The Dragon Dance

Westerners doing business in China must be willing to master certain steps.
Scott Leibs and Tom LeanderSeptember 27, 2001

When the fate of a U.S. spy plane touched off tense negotiations between Washington and Beijing earlier this year, American companies felt the reverberations. Fearing that the situation might devolve into “Cuban missile crisis proportions,” for example, executives at running-shoe and athletic-apparel maker Saucony Inc. spent hours on the phone with the company’s staff in Taiwan, hashing out how quickly molds and dies could be moved from mainland manufacturing sites to other facilities in Taiwan. “All of our footwear is produced in China,” says Saucony CFO Michael Umana, “and that accounts for 90 percent of our business, so we had reason to be concerned.”

In business as in so many other areas, however, China remains a study in contrasts. Even as that spy plane languished on an island 1,300 miles away, in the city of Wuxi, another plane met with a far different reception. This one bore AstraZeneca Plc CEO Tom McKillop and other senior brass to the site of the drug maker’s newest factory. Amid exploding firecrackers and the serpentine swaying of a lion-and-dragon dance troupe, the executives mingled with local and national officials, discussing the benefits that would accrue to both sides from the company’s $100 million investment. A political crisis may have hovered like the sword of Damocles over American business interests, but on this sunny day the outlook for Sino-Western cooperation couldn’t have appeared any brighter.

Yet even this success was precarious. Relations between the British- Swiss firm and the Chinese government could easily have blown up into the business-page equivalent of an international incident, a fact not lost on Ng Wai Lun, CFO of AstraZeneca China. The company had been romancing local officials for years, while ignoring Beijing. That departure from protocol was part of a very deliberate plan for growth in China, one that preserved precious capital at the expense of potentially alienating the very people who now joined in the celebration. It was a risky strategy, but as Ng says, “Don’t come to China unless you’re willing to be a buccaneer.”

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British-Swiss firm and the Chinese government could easily have blown up into the business-page equivalent of an international incident, a fact not lost on Ng Wai Lun, CFO of AstraZeneca China. The firm had been romancing local officials for years, while ignoring Beijing. That departure from protocol was part of a very deliberate plan for growth in China, one that preserved precious capital at the risk of alienating the very people who now joined in the celebration. It was a perilous strategy, but as Ng says, “Don’t come to China unless you’re willing to be a buccaneer.”

As China prepares to join the World Trade Organization (WTO) later this year, many foreign companies can only hope that Ng is exaggerating. They’d prefer to expand into what one American executive dubs “the last plum of Asia” with no more trepidation than surrounds a foray into any new market. CFOs, in particular, are not known for their buccaneering ways, and many would love to see signs that China has become substantially less risky.

FOLLOWING TIANANMEN Square, the United States initiated a number of economic sanctions, some of which remain in effect. In contrast, U.S. officials sought to “isolate” the recent spy plane incident, according to international trade specialist Jim Robb at the U.S. Department of Commerce, “so there has been no direct fallout to date.” That has been a welcome outcome for those who remain bullish on China, as were the results of June meetings between China, the United States, and European Union officials that seem to have paved the way for China’s entry into the WTO in November. Last month’s announcement that Beijing will host the 2008 Summer Olympics is one more indication that China and the West are drawing closer.

Unfortunately, the country that embraces the principles of yin and yang continues to exhibit a vexing duality regarding business. Negotiations proceed slowly and with extreme decorum, yet corruption remains rampant; government is involved in business to a degree far greater than in any other major market, yet AstraZeneca and others have succeeded in part by proceeding with a fair degree of independence; companies are encouraged to take over ailing state enterprises, yet are severely restricted in how they finance these and other ventures; proposed deals are approved yuan ze shang, or “in principle,” but may be quashed with virtually no explanation, often after months or even years of negotiations.

Companies have managed to accommodate themselves to many of those contrasts; some, in fact, have found ways to thrive within the current system. No one denies that doing business in China remains difficult, but a new reality is taking hold.

For many foreign companies, the most pressing issue is how quickly the gap will close between their dream of 1.3 billion consumers and the reality of 376 million city-dwellers in possession of anything resembling disposable income. True, China’s per-capita growth rate increased last year after four years of decline, retail sales rose almost 10 percent, and an increasingly urban population has seen leisure time expand. Yet China remains a country in which Kentucky Fried Chicken is regarded as something of an upscale restaurant.

David Uhazie, CFO of Kodak China Co. Ltd. and of Kodak’s Greater Asian Region, says that patience is a fundamental requirement. In 2000, Kodak turned its first profit in China, and Uhazie believes the company is poised to build on last year’s results. Yet it must to some degree bide its time as it struggles to get customers to view photography as an everyday activity, not something limited to special occasions. Kodak entered China the old-fashioned way, with a massive $1.2 billion infusion of capital plus huge sums spent on marketing and channel development. It endured a long march to profitability, including five years spent negotiating with the Chinese to reform the country’s state- owned photographic industry. When that deal was consummated, in 1998, rival Fuji Photo and other foreign manufacturers were shut out of the market for four years, and Kodak was on its way to establishing a China presence that now encompasses seven manufacturing installations and a sizable retail network.

Like most CFOs familiar with China, Uhazie is enthusiastic about the rate of change and frustrated by lingering problems, most of them associated with bureaucracy and the lack of transparency. “Even when we won the contract,” he says, “we never really found out why.”

When the American Chamber of Commerce in Beijing polled 160 of its members last year, 43 percent cited lack of transparency as among their chief challenges. Bureaucracy topped the list, and corruption and market access were also cited. The boundaries between those four issues are vague, and could easily be combined into one grand challenge, which is summed up nicely by Ball Corp. CFO Ray Seabrook: “China is China. It’s a place where nothing is easy.”

In June, Ball Corp. decided that the best way to make things easier was to scale back its presence by exiting certain lines of manufacturing and consolidating other operations. The food-and-beverage- packaging company took a $185 million aftertax charge, and readily admits that despite several years of profitability, the market has not met its initial expectations. Yet even in the midst of that retrenchment, Seabrook recommends that companies forge ahead. “China is a place you want to be,” he says, “but the best course is to begin with a small presence and see what happens.”

Many companies have decided that small is beautiful, and that a measured approach is the best way to reconcile the long-term view that China demands with the shorter-term results that companies need. Anheuser-Busch Cos. got a toehold in 1995 when it bought 5 percent of Tsingtao. “That gave us access to and understanding of the Chinese beer market,” says Philip Davis, vice president and managing director of Anheuser-Busch Asia Inc. and chairman of the company’s Wuhan International Brewing facility. “We did an in-depth assessment of the market, screened breweries, assessed the competition, and evaluated potential partners.”

Despite that due diligence, Davis makes no bones about the fact that once Anheuser-Busch was in China, “we had to reevaluate our entire approach, from packaging to sales. You’ve got to be flexible and responsive to change to succeed here.”

The efforts paid off: Last year, the company cited its increasing volumes in China as the primary reason its international profitability rose 23.6 percent.

Stephen Shaw, a director in the Hong Kong office of consultancy McKinsey & Co., agrees with Davis on the importance of flexibility. “There is no doubt that Chinese business leaders ‘get it’ like never before,” he says. “They are now far more accepting of Western business practices and see that they must embrace them in order to compete. But ROI remains elusive, and companies must have a strategy for uncertainty.”

THAT MAY BE A POLITE way of saying “buccaneer spirit,” and the experience of AstraZeneca China CFO Ng highlights the fact that there is still no single right way to succeed in China. CFOs routinely balance risks against opportunities; in China, that exercise remains rich in nuance. When AstraZeneca was approved to do business in Wuxi in 1994, the deal stipulated that the company would build a new factory in a reasonable amount of time. But the London-based firm was loath to make a large capital investment immediately, so it leased part of an existing plant and set up a factory-within-a-factory. Since this approach created more jobs and tax revenue year by year, Wuxi officials didn’t oppose it, and Beijing either looked the other way or simply didn’t know.

This approach allowed AstraZeneca to test the market, refine its distribution, and, most important of all, get a grip on receivables. It can be very difficult to get paid in China, and AstraZeneca wanted to make money before committing capital to a new factory.

Ng says that in the past nine months he has witnessed not only marked progress toward a free-market economy, but also a change in the nature of the CFO position. “Because most problems eventually end up in finance,” he says, “CFOs have had to spend a lot of time dealing with customs issues, employee regulations, drafting of distribution contracts, and many other functions, because there were simply so many risks to anticipate or respond to.”

Today, he says, as business processes become more standardized, CFOs are free to address more-substantive issues. Ng is a firm believer that “what can be measured can be managed,” and he says that CFOs in China need to arm themselves with as much operating information as possible–not just to battle the fraud and managerial missteps that plague many companies, but to help compensate for the dearth of experienced finance staffers.

ON A MORE FUNDAMENTAL level, CFOs now say that one key to success in China is to focus on cash. “I spend a lot of time on treasury matters,” says Kodak’s Uhazie. “China is a very complex place when it comes to borrowing money, making payments, and maintaining cash flow.” Kodak built its operations on U.S. dollars, Uhazie says, but has been aggressively trying to fund ongoing ventures with renminbi (or RMB, China’s currency). It’s working with China’s Big Four state-owned banks to convert its U.S. dollar exposure into RMB using export receipts. That provides the company with a hedge against currency movements, and eases Chinese perceptions that foreign invested enterprises (FIEs) are primarily interested in taking as much money out of China as possible.

In fact, while Uhazie and others believe that entry into the WTO will improve business conditions in China, they don’t expect it to radically transform the market. “There is a naïve view that, post- WTO, companies will be able to import their goods into China and thrive here,” says Muan Lim, worldwide vice president for finance technology at Hewlett-Packard in Hong Kong. “But China wants companies here that can create employment and transfer technology, not plunder the market without contributing.”

Many China watchers believe that Post-WTO, the banking system will be among the prime beneficiaries of intensified competition, and already the Big Four have shown a new willingness to develop closer working relationships with FIEs. Greater investment in information technology should help, since today something as routine as a money transfer from one city to another can encounter a variety of snafus.

More immediately, companies are finding they can help themselves by taking a harder look at receivables. Market share had been considered perhaps the top priority for FIEs eager to gain a presence in China, but increasingly cash flow is king. At AstraZeneca, general managers granted customers excessive payment terms because their careers depended on sales, not receivables. Ng pushed for changes in collections and credit policies. He got the finance department involved in assessing creditworthiness and, more to the point, demanded that new customers pay up front. (Long-term customers get 30-to-60-day terms.) That provided a double benefit, since it gave AstraZeneca cash to reinvest and also gave it an edge against competitors.

“Distributors [and other customers] have a limited amount of cash,” explains Ng. “Each time we get payment up front, that takes cash away from Glaxo or Unilever.” Meanwhile, Anheuser-Busch has put its wholesalers on a C.O.D. system; the company says the move helps it avoid supply-chain hiccups.

THE OTHER CRITICAL area in which companies can shape their own destinies is in developing managerial talent. “It’s by far the number-one challenge,” says McKinsey’s Shaw, noting that “the talent at the top has gotten better, but few companies have a deep bench.” Kodak’s Uhazie agrees. “Next to treasury, I spend most of my time coaching my direct reports,” he says. Of Kodak’s roughly 300 finance staffers in Asia, only 2 are American, and Uhazie is one of them.

While a 1995 study conducted by the United Nations found that China produced fewer college graduates per 100,000 of population than most emerging markets (India and Brazil produce 5 times as many; in developed economies, Canada, at the top, produces 35 times as many), large multinationals with name recognition have access to plenty of recruits. Smaller companies face a challenge, but HP’s Lim says one way to succeed is to place local managers in other Asian operations and bring them into China once they’ve acquired the needed experience.

More challenging still may be hanging on to the best and the brightest. Job-hopping is already rampant, and Uhazie believes that once China joins the WTO, the battle for talent will become an inescapable part of doing business there. “But you can’t rely on hordes of expats,” says Shaw. Indeed, McKinsey has found that expatriates cost as much as five times what local managers cost, and demonstrate a high rate of failure–15 to 25 percent on average, and up to 70 percent in developing countries.

“In a fast, unpredictable market, the best way to cope with risk is to have talent,” says Shaw, “and the only viable way to achieve that is to hire and train local workers.” Local talent not only improves the quality of daily operations, it also gives headquarters some much- needed peace of mind. “We’ve got 30 people in our Taiwan office,” says Saucony’s Umana. “They are all Taiwanese, and they give us an invaluable link to the mainland. They can handle the negotiations, do the necessary QA work, and so much else. They give us a very good ear to the ground.”

Twenty-two years after China took its first tentative steps toward capitalism, it remains a country more notable for its potential than its profits. Entry into the WTO won’t substantively change that. A tolerance for risk remains an essential element for success, but so does a desire and willingness to eliminate that risk. That’s a form of yin and yang that CFOs have long been familiar with. For many, China may prove to be not so foreign after all. —

Scott Leibs ([email protected]) is a senior editor of CFO. Tom Leander ([email protected]) is managing editor of CFO Asia.


China’s entry into the World Trade Organization (WTO) will be a critical step in its adoption of Western business practices, and it can’t happen fast enough for most executives. But Thomas Doeke, CFO of Beijing-based Siemens Ltd. China, could be forgiven for taking a contrarian view. His firm has thrived amid the opacity of the current system, leading a charmed life that other companies must surely envy.

Having established a presence in Shanghai in 1904, Siemens shut down in 1939 as the Japanese stormed in. During that time, an Oscar Schindler­like manager took in thousands of fleeing Chinese, housing them on Siemens property and negotiating their escape.

Chinese officials have long memories, and the company’s actions have paid dividends. Siemens has proved to be the most effective multinational to do business with the People’s Bank of China (PBOC). It needs to be, because its China operations are highly diversified–with majority stakes in more than 40 enterprises or joint ventures–and China typically presents substantial obstacles for such diversified foreign companies. Cash and liquidity management can be particularly difficult, because laws don’t allow loans between different units of the same company or pooling that would allow companies to build value with the cash they have.


Thanks largely to heavy lobbying by Siemens, the government threw a bone to multinationals five years ago, allowing companies to set up their own financing units. But it placed the bar extremely high: eligible companies had to have achieved at least $3 billion in revenue in the previous three years and be ready to invest $80 million in their finance arms. Only Siemens and General Electric reportedly have accepted these terms and obtained licenses.

Siemens’s nonbank financing unit allows the company to borrow in large amounts from one of China’s four state-owned banks and then relend the money at preferential rates to its units throughout the country.

The cash management opportunities also lower the group’s cost of capital. When a joint venture or a wholly owned subsidiary pays a dividend to Siemens Ltd. China, the cash is pooled, then reinvested in monetary instruments or pumped into another operation that has immediate cash needs. Units that have excess cash on their hands can send it to the finance company, under a stipulation set by the PBOC that they leave it there for three months, where the funds can be put to good use or invested in short-term instruments.

This arrangement allows Siemens Ltd. China to enter and exit businesses far more quickly than it otherwise could. Siemens’s advantage seems so fundamental that it raises the question: How do other companies fund new operations? Answer: at considerable risk. Either they have a very high cost of funding or involve themselves in risky “handshakes” with one of China’s state-owned banks or small, privately owned banks from the fledgling nonstate financial- institution sector.

These advantages will likely vanish in the post-WTO world, and with it at least a portion of Siemens’s advantage. Doeke rather disingenuously suggests that this may not necessarily be a good thing. “Sure it’s tough to do business in China [today],” he says, “but the same difficulties exist for everyone. After the WTO, the risks will be much harder to calculate.” That is, in all likelihood, a risk that most companies will happily take on. –T.L.