Promised Land

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.

Joshua Kurlantzick is a writer in Washington DC.

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