Promised Land

Uneasy Success

Using many of these strategies, entrepreneurs have racked up numerous victories in China. Kushner says his company has been profitable every year since 1997. NewTone Communications expects to be profitable by the beginning of 2003, less than five years after the company was founded; by comparison, nearly all U.S.-focused communications companies that got their start in the late 1990s have gone bankrupt or continue to struggle. Chic Logistics has reached profitability and expects to become the major national logistics provider by 2005: The company has already beaten out international logistics players like Maersk for several contracts in China. Phoenix Tech-nologies has signed major deals with several of the largest Chinese computer firms, including Legend Computer, and expects China to become one of its two main sources of profits within five years.

Despite successes, smaller companies are not breathing easy. "When I first [began] going to the mainland 20 years ago, people would come up to you and touch your skin to see if you were real," says Peter A.J. Gardiner, executive chairman of the board of directors at Zindart Ltd., a Hong Kong-based toy manufacturer. "Now, Chinese [people] in most cities are more comfortable dealing with foreigners and have brought some private businesses up to foreign standards." Indeed, the number of private local companies in China rose by 15 percent in 2001, and these firms will increasingly dominate the economy as the hulking state enterprises-vestiges of Mao's era-are downsized and eliminated. In November 2003, the Chinese goverment announced that it was accelerating the privatization of thousands of state-owned businesses.

Adding to small companies' worries has been the SARS virus that hit China over the past year. Although there's little evidence that SARS has made it harder for companies to recruit employees or to manufacture and ship goods for export, several economic studies have estimated that, by scaring consumers, SARS will shave at least one percentage point off China's annual growth, potentially depressing the market for many goods.

Meanwhile, the prolonged boom in China, which has posted economic growth rates of more than 7 percent per year for more than a decade, draws more foreign competitors into entrepreneurs' industries. Since China entered the World Trade Organization in 2001, committing itself to further liberalizing its economy, investment into the country-already the second-largest recipient of foreign capital in the world-has actually increased. Nomura Securities, a Japanese research firm focusing on Asia, has predicted that foreign trade with China will double by 2006.

And entrepreneurs, who typically have fewer resources with which to defend themselves, are not immune to piracy and graft. A 2000 PricewaterhouseCoopers survey of 35 countries found that only Indonesia and Russia boasted more corrupt government officials than China. Even Chinese leaders recognize the extent of the problem. Huang Jianping, a former top official at the Ministry of Foreign Trade and Economic Co-operation, admitted that it is cheaper to pay off bureaucrats in China than to spend money on law and accounting firms that would enforce trademarks and rigorously audit operations and balance sheets.

"If some kind of [intellectual property] theft happens, what are you going to do?" says Gardiner. "The court system is improving, but you are still not going to go there with a serious intellectual property claim."

Kushner agrees: "My products usually get knocked off by local competitors in about two months-three months, tops." Despite the potential hazards, though, China still promises to be fertile ground for entrepreneurs in search of new opportunities in an untapped market.

Trekking Into New Territory

If you're considering taking your business to China, here are some strategies to help ensure your success:

1.Wear out your shoe leather.
Entrepreneurs say the only way to decide whether you should move some production to China, target the Chinese market, or even transfer your whole operation is to make a lengthy visit-at least one month long-to areas where you hope to locate. It is very difficult to schedule appointments in China more than a few days in advance, so be prepared to land in a city and wait until the people you need to meet are available. "You have to get on the ground, meet potential partners and check out factories to see for yourself whether everything is right for you," says Robert Kushner, founder and managing director of Pacific China Industries Ltd., a Hong Kong company that manufactures novelty items. "Business in China is about building relationships, and you have to see whether there's potential for good relationships."

2.Learn the lingo.
Outside of Hong Kong and a few areas of Shanghai and Beijing, few people in China are proficient in English. Learning at least rudimentary Mandarin Chinese is essential for entrepreneurs who cannot afford the retinues of translators and personal assistants the multinationals employ. Even if you have the capital to afford a full-time translator (quality Chinese-English translators are expensive), using a translator exclusively will make it harder for you to build relationships with local Chinese partners. Many universities and private language schools in the United States offer courses in Chinese, and most major Chinese cities have language schools for foreign businesspeople.

3.Pay managers a high wage.
Though the low cost of labor is one of China's most important comparative advantages and a major reason why foreign companies locate in China, experts say one of the biggest mistakes foreigners make is to pay local managers too little. "For Chinese managers with a college degree and some English skills, the job market is great," says George Man, Asia-Pacific general manager of Phoenix Technologies Ltd. "Pay them an above-market wage, or you will constantly have managers jumping to other foreign firms or big local companies, and your costs will go through the roof."

Kushner agrees, saying: "You have to pay managers top dollar, and you also should pay the inspectors at your plants well; otherwise you'll wind up with too much of your product going out the back door, and one day, you'll see your items for sale in the local markets."

Joshua Kurlantzick is a writer in Washington DC.

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This article was originally published in the January 2004 print edition of Entrepreneur with the headline: Promised Land.

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