Figuring Out the Chinese Business Scene

The most common types of businesses in China include the following:

✓	Companies owned by the government: China still has many state-owned companies kicking around — they’re a product of the old days when the government owned everything. Although they play a lesser role in today’s economy, these companies are still significant in China.
✓	Privately owned Chinese companies: Privately owned companies are fast becoming the backbone of the business scene in China. Supporting smaller businesses has become a priority for the Chinese government.
✓	Foreign-invested companies: Foreign investors from nearly every corner of the world — large, brand-name multinationals to small- to medium-sized family-owned companies — continue to flock to China.

The business scene is constantly changing, with a lot of relatively new businesses flourishing while many larger, older, and unprofitable companies bite the dust. All in all, China is teeming with young and old, large and small, and private and state-owned companies. (For more on China’s economy, please see Chapter 2.)

Getting state-owned businesses in shape

When China first started down the path to fix its economy, the state owned almost all of China’s businesses. In the late 1970s, about 80 percent of China’s gross domestic product came from state-owned enterprises (SOEs). The SOEs provided most of the jobs for China’s hundreds of millions of workers. The big state companies also gave the workers social and healthcare benefits and a place to live. Unfortunately, many of the SOEs were unprofitable and caused a financial drain on China’s government.

The SOEs didn’t need to be profitable. After all, China was a planned economy, where the state set production quotas. SOE managers didn’t understand market forces, and they weren’t supposed to. However, China’s leadership recognized that to modernize, they needed to reform the SOEs, which weren’t prepared for the socialist market economy China’s leaders were creating. So the Chinese leadership made some big changes in SOEs. They chose to keep the good ones and shut down, sell, or auction off the bad ones, which was no easy task. Many of these state-managed companies were the only employers the Chinese workers ever knew. The change was a painful process for companies and workers who were used to the security of lifetime employment.

The Chinese leadership made big bets that certain state-owned companies could compete and prosper against foreign companies. With a little help from protectionist policies, this approach worked well in many industries, including telecommunications, power, and financial-service companies.

Now China has only about 20,000 SOEs operating in the whole of China, down from more than 120,000 in the mid-1990s. The number of SOEs is fast shrinking as the number of new privately owned companies grows by leaps and bounds. Even some foreign companies are buying companies that were SOEs.

Supporting private businesses

As China marches to the beat of a new socialist market economy, it knows it needs to support private businesses in a big way. Supporting privately owned businesses took time for the Chinese. After all, China’s a socialist country!

Why the big shift in attitude to allow private businesses to grow and prosper? When China’s leaders decided to unload unprofitable SOEs by selling them or shutting them down, it needed to create jobs for the unemployed and the huge number of people entering the workforce. Privately owned businesses are helping create more new jobs, which China needs so it can keep its fast-growing population employed.

The Chinese government is making sure the smaller companies can participate in China’s booming economy, too. Small-to-medium enterprises (SMEs) are at a huge disadvantage to the large foreign and domestic companies operating in China. For example, SMEs have more problems getting access to money to invest in their businesses. They’re not as powerful as the big companies in terms of influence and guan xi (relationships — see Chapter 15). The government helps smaller companies in a variety of ways, including designing special laws and regulations. For instance, under China’s SME Promotion Law, the government has set up a credit rating system and offered management training, too.

China has many good reasons to support SMEs: They represent 99 percent of all companies in China! The total number of registered SMEs is around 5 million companies. They contribute more than 60 percent of the total industrial output in China.

Privately owned companies are creating the first wave of really wealthy entrepreneurs in China. This development is significant within China. Many of China’s new entrepreneurs have very deep pockets and are formidable competitors for foreign companies.

Growing a small business: From bicycle shop to auto parts powerhouse The son of a Chinese farmer, Lu Guanqiu, built a modern enterprise called Wanxiang Group (pronounced wan-shang) from a small bicycle repair shop he started in 1969. Today, Lu, the founder and chairman of the company, is one of the richest people in China. The multinational company, headquartered about 100 miles east of Shanghai, is now the second-largest privately owned firm in China and is aggressively expanding overseas. It’s fast becoming one of the major players in U.S.-China trade. Wanxiang is China’s largest car parts manufacturer, and it’s involved in finance, real estate, import and export, and other interests as well. The company has 40,000 employees worldwide and US$4.2 billion in sales. China’s leadership has made the commitment to support China’s globally minded companies through deal financing and risk management, and Wanxiang is a shining example of the type of firm China wants to support. Its humble beginnings as an SME give China’s leaders every reason to be proud. If your business in China can provide products, support, or services to these successful homegrown companies, you’re in a good position to succeed.

Encouraging foreign investors

The leaders of the country figured out pretty quickly that they needed foreign investors to help China change and grow. The government leaders knew China could attract the biggest and best multinationals from around the world. After all, what multinational company (or any other for that matter) can ignore a market with a population of 1.3 billion people?

The road wasn’t easy. Convincing foreign multinationals that the business environment was stable took many years. And some bumps along the way — such as the Tiananmen Square incident — rattled a few foreign investors. But many of the foreign companies that stayed the course in China are very profitable today.

When China began looking more stable, more foreign companies considered going to China. And come they did! Multinational company investment is pouring into China. All the major global companies are making big investments in China. Chinese government authorities say that 480 of the largest 500 companies in the world are already invested in China. Most large globally minded companies see China as a top priority for their business and plan to invest even more in the future.

China has attracted more investment by foreign companies over the past 15 years than any other developing country in the world. The latest figure is that China has received around US$700 billion since it opened its door to foreign investment. China is like a big magnet for foreign investment.

Going forward: Risks on the horizon According to the World Bank, China is the fourth-largest economy in the world based on gross domestic product (GDP). It’s a major player in the global economy. If you adjust for purchasing power differentials, China is already the world’s second-largest economy. Growing at a faster clip than any other major nation, it’s on course to surpass the United States as the world’s largest economy within two decades. But with such heady growth come risks and concerns. Here are some issues that can potentially lead to an economic slowdown: ✓ The disparity between the haves and the have-nots is growing in modern China. The amount of social unrest is rising, which may destabilize China’s economic development. ✓ The continued debate and uneasiness about China’s currency revaluation causes concern in the financial markets. On one hand, if China responds to pressure from other countries to appreciate the RMB (see Chapter 10), but does so too quickly, China’s economic growth may slow a good deal. On the other hand, if China appreciates the RMB too slowly, some of China’s trading partners (particularly the U.S.) may take protectionist measures, which would also hurt China’s economy. ✓ Although China marches down the path toward a socialist market economy, little political reform is going on in the country. ✓ China’s environmental problems continue to worsen, despite the fact that the central government leaders call the environment a priority. ✓ Disputes with other governments may lead to disruptions in China’s ability to import energy and vital commodities. One such trigger would be a war with Taiwan.

Benefiting from the five-year plan

The five-year plan is a roadmap for the Communist leadership to tell the country the direction the Party wants to take. It’s also a way for the Party to rally support internally, set targets and future priorities for the country, and determine which industries to encourage foreign investment in.

The government’s main priority is to build a “harmonious society” in China. In other words, China doesn’t want an imbalance between the haves and the have-nots, instead preferring a growth that benefits a wider group of Chinese people. Here are the main thrusts of the 2006–2010 plan:

✓	Improve noncoastal economies: China doesn’t want to have too wide a gap between the wealthy coastal areas and the poorer inland provinces, so it’s placing greater emphasis on improving the lives of people in the countryside and developing western China. Infrastructure has been a problem in developing the region.
✓	Strengthen service industries and improve industry: China’s leaders want greater balance between industrial growth and the service sector. Therefore, the government will support faster growth particularly in service industries. As for industrial growth, China’s leaders don’t think more is better — they want structural upgrades.
✓	Save resources: China wants to save natural resources by reducing its dependency on commodities such as oil, gas, and coal. With soaring energy needs in China, the government wants to explore alternative energy and support conservation. It also needs to deal with water shortages.
✓	Become cleaner: China’s government wants to decrease the widespread pollution of the land, water, and air.

Several other important areas in the five-year plan include education, social security and insurance, and healthcare. To find out more about China’s five-year plan, go to english.gov.cn/special/115y_index.htm.

As China sets out its priorities in the five-year plan, it’s telling you and your business what opportunities lie ahead in China. China has a proven track record of assisting foreign firms that help China realize its goals. If your business happens to be in pollution control, healthcare, agriculture, services, or any one of the sectors highlighted in the plan, you’re one step in the right direction already. For more on investment opportunities, go to Chapter 7.