Dreams of China Green Fields

 

by William R. Dodson

11 June 2003

 

Kei Pang, Vice President, International for Emerson, was adamant about his company’s strategic approach to entering the China market: “Joint Ventures (JV) with Chinese companies are just too much trouble. “You spend all your time with high-level [Chinese] officials talking about policy, but never about operations. Even after you sign the contract the negotiations continue.”  Wholley Owned Enterprises (WOEs) and “Green Field” investments are far more straight-forward to set up and maintain. “Anyone in a Joint Venture now is trying to buyout their Chinese partner, if they can.”

 

Mr. Pang delivered his presentation, “Doing Business in China: The Emerson Experience,” sponsored by the Greater St. Louis China Business Forum on June, 10 2003. Mr. Pang has been with Emerson for twenty years. A native of Hong Kong, he was educated in Hong Kong, the United Kingdom and the United States. He has worked in the China theater his entire career at Emerson. Emerson’s revenues in 2002 were US$13.8 billion. Founded in 1890 in St. Louis, Missouri, Emerson products are sold in 150 countries, supported by 320 manufacturing locations worldwide. Emerson products include environmental technologies, motor technologies, electric tools, electronics and more (http://www.gotoemerson.com/about_emerson/index.html).

 

Emerson began its China investment back in 1979 with technology licensing to Chinese manufacturers. In the 1980s it formed joint ventures with Chinese companies. Since the late 1990s Emerson has invested increasingly in WOEs through outright acquisitions of Chinese companies or “Green Field” operations. “Green Field” refers to a foreign company’s investment in the land and infrastructure that will support a new business. The land may or may have a facility already. Increasingly, companies that are not bound by Chinese regulations to form joint ventures with Chinese firms are looking first to Green Field investments. The companies have either heard of or have experienced the frustrations of JV negotiations; or, having formed a JV, have met with great challenges in getting the JV to operate up to the standards set by headquarters.

 

Mr. Pang detailed the development of the China market as he had experienced it over the past twenty years. Highlights included:

 

1979 – 1990: Negotiations were lengthy; hard currency was difficult to come by; all the companies were government controlled and there was no consumer market. Poor product quality and poor service prevailed.

 

1990-1995: Post Tiananmen Square Protests saw rapid infrastructure development; the development of privatization and property rights; the rise of assembly plants; a growing local market with accompanying high inflation.

 

1995 – present: With increasing numbers of private companies established the world market sees product and service quality improve. A market economy takes hold with price reductions, hundreds of millionaires and an impact on the world economy 20 times greater than that of the 4 Dragons – Singapore, Taiwan, South Korea and Hong Kong.

 

Opportunities abound for selling products into the China market. Also, the cost of the Chinese labor pool is attractive to companies that want to source production from China. Indeed, Mr. Pang noted that at Emerson labor costs to build a small motor in China are US$1.53; in Mexico US$2.36 and in America US$4.20.

 

Still, questions abound as to the most appropriate way to conduct business in China. Should a company use a local agent or partner with a Chinese company or go it alone? Or develop a green field operation, form a joint venture with a Chinese company or acquire a company? In addition, companies in the China market must consider that credit risks are high and tax rules and regulations in localities can require detailed knowledge of the environment. Mr. Pang described a very common form of payment to be the Banker’s Acceptance Draft (BAD). The BAD is like a money order that a payer often post-dates sixty to ninety days. Often, payees will sign BADs they receive over to creditors. BADs are a work-around to a system that still lacks a formal system for capitalizing companies.

 

“The key to success in China,” Mr. Pang said, “is finding good people locally. There is no substitute for this requirement.” One luncheon participant noted that the salary expectations of Chinese returnees to the Mainland were greater than in the past, and that local engineers were far more mobile than ever before. Mr. Pang responded he had seen the same trend, and noted that the turn-over of hourly employees was extremely low in Emerson facilities: 2.5% per year. He noted one way to retain talent is “to get local staff to participate in the adaptation of U.S. business processes to the Chinese environment… also, develop Chinese talent in the United States with the requirement that the Chinese will return to China to work.” Incentive plans are also important, he noted.

 

On the subject of why Emerson prefers now to “go it alone” when establishing a new business in China, Mr. Pang gave as a major reason that, “if a Chinese company is very good, it doesn’t need Emerson; if the company is not good, Emerson does not want to partner with it.” With the abolition of many Chinese regulations that forced foreign companies into joint ventures, the time has finally come in China when American companies can enter more the most dynamic market in the world on their own terms.