Proceed with caution: China expert says the new Promised Land can be perilous for novices
Tyler Anderson/National Post"For Canadians, I think you have to pick your sector and you can’t be naive," says James McGregor, who has lived in China for more than 20 years and now consults businesses looking to business there. "Don't believe you can do business by remote control -- that you can be here and enjoy the nice life in Toronto while you're entrusting someone with your company and intellectual property over in China."
James McGregor moved to Beijing in 1990 to work as a journalist for the Wall Street Journal and went on to lead Dow Jones’ in China before shifting gears to become a venture capitalist and eventually a business author. More than 20 years in the world’s most complex and enigmatic market has afforded Mr. McGregor a great deal of insight on the best way to do business in China — carefully. His contention in No Ancient Wisdom, No Followers: The Challenges of Chinese Authoritarian Capitalism is that China’s brand of commerce isn’t necessarily congruent with the laws and practices of western society, and that westerners must understand the cultural nuances of the Chinese economy and the intricacies of Chinese state-owned enterprises before diving head first into the new Promised Land. That was the message he delivered to a group of more than 200 students at York University’s Schulich School of Business on Jan. 22 as part of the school’s partnership with law firm Davies, Ward, Phillips & Vineberg. Prior to his presentation, Mr. McGregor sat down with FP’s Dan Ovsey for a candid chat about the dangers of doing business in China — from the threat of intellectual property theft to the inclination of the Chinese to manoeuvre around established regulations and the less-worrisome risk of having Chinese State-Owned Enterprises (SOEs) infiltrate western markets. Following is an edited transcript of their conversation.
Q: You speak with a lot of students during your lecture tours. Do you find the audience is surprised about what you have to say regarding China?
A: Not really. I go to a university and I talk about China and at least half the auditorium is Chinese, because there are so many Chinese students in all of these universities. Many of these kids have never lived as adults in China. They’ve never done business or transactions, so they’re very attentive because I’m introducing a China many don’t know. For non-Chinese students, it’s a range. You’d be amazed at how many travelled to China or had a brother that went to China — everyone’s got a China connection these days. I think a lot of them are interested in it — at least in the United States — because they’re looking at China and other countries as opportunities.
A: Not really. I go to a university and I talk about China and at least half the auditorium is Chinese, because there are so many Chinese students in all of these universities. Many of these kids have never lived as adults in China. They’ve never done business or transactions, so they’re very attentive because I’m introducing a China many don’t know. For non-Chinese students, it’s a range. You’d be amazed at how many travelled to China or had a brother that went to China — everyone’s got a China connection these days. I think a lot of them are interested in it — at least in the United States — because they’re looking at China and other countries as opportunities.
In China, you start off with complete distrust and then you build trust on top of that
Q: What is the most typical mistake made by young westerners when they first enter the Chinese market?
A: These young people go to China and they’ll go to Shanghai or Beijing and they never learn the language because they end up hanging out in the bars in expat land and maybe work for a foreign company. They never really assimilate. My advice to anybody young is go and learn the language and move to secondary or tertiary cities. The living conditions in these cities are better than Beijing or Shanghai because they’re so big and polluted and crowded. You go to Qingdao, Chengdu, Dalian, you’re treated better now as a foreigner because you’re more of a novelty and you’ll learn the language — and then go to work for a Chinese company and really get into the belly of the beast and learn how China operates, how people think, how they do business. You’re going to come out of that and that’s going to be a base for a very strong career somewhere because China is going to be such a major part of the world. You’ve got to be adventurous and do that.
A: These young people go to China and they’ll go to Shanghai or Beijing and they never learn the language because they end up hanging out in the bars in expat land and maybe work for a foreign company. They never really assimilate. My advice to anybody young is go and learn the language and move to secondary or tertiary cities. The living conditions in these cities are better than Beijing or Shanghai because they’re so big and polluted and crowded. You go to Qingdao, Chengdu, Dalian, you’re treated better now as a foreigner because you’re more of a novelty and you’ll learn the language — and then go to work for a Chinese company and really get into the belly of the beast and learn how China operates, how people think, how they do business. You’re going to come out of that and that’s going to be a base for a very strong career somewhere because China is going to be such a major part of the world. You’ve got to be adventurous and do that.
Q: What do you see as the greatest danger of doing business in China?
A: Being naive.
A: Being naive.
Q: Naive in what way? How are we putting ourselves in a perilous position?
A: I’m from Minnesota, so I’m almost a Canadian. Canadians are very trusting people and believe the guy across the table is telling them the truth and he’s honest and he’s a good guy. Don’t believe that. I’m not saying everyone is bad; I’m just saying don’t take things at face value. Do your due diligence, and trust but verify.
A: I’m from Minnesota, so I’m almost a Canadian. Canadians are very trusting people and believe the guy across the table is telling them the truth and he’s honest and he’s a good guy. Don’t believe that. I’m not saying everyone is bad; I’m just saying don’t take things at face value. Do your due diligence, and trust but verify.
In the west, we do business with the mentality of ‘I trust you until I don’t because I have a legal system where I can get you if you do something against what we agreed to’. In China, you start off with complete distrust and then you build trust on top of that. So, the person across the table is thinking the same way. If you offer them a fair deal, they’re going to think you’re screwing them and that they have to dial back that deal. You don’t offer someone a fair deal. You offer them an outrageous deal because then you can dial it back to be a fair deal.
Q: Economists and business experts all seem to believe that Canadian businesses need to diversify their market base and move beyond the NAFTA zone and toward emerging markets (with China being the most often-cited). Your message seems to be “Go to China but be careful”. Is that right?
A: Be very careful, but it also depends what sector you’re in and what you do. There’s a lot of opportunity now in health care because they have to reform their health care system and foreign know-how is often the way to do it. Retail is fairly strong. I work with companies that are outputting 30, 40, 50 stores a year now.
A: Be very careful, but it also depends what sector you’re in and what you do. There’s a lot of opportunity now in health care because they have to reform their health care system and foreign know-how is often the way to do it. Retail is fairly strong. I work with companies that are outputting 30, 40, 50 stores a year now.
For Canadians, I think you have to pick your sector and you can’t be naive. Don’t believe you can do business by remote control — that you can be here and enjoy the nice life in Toronto while you’re entrusting someone with your company and intellectual property over in China. Be on the ground or have your own people on the ground and work away at it every day.
Q: Your contention is that Chinese State-Owned companies are incompatible with global capitalism. Tell me more about that.
A: State-owned enterprises are political entities. They’re leadership is appointed by the party organization; the same people who appoint mayors and governors and party secretaries, etc. These organizations also have monopolies or quasi-monopolies and control market situations. When you’re doing business with them, you’ve got to remember that that person across the table doesn’t think like you do. They have a political agenda and a political career; they’re not pure business. Also, they when they come overseas here, they’re designated national champions to come out and grow global businesses for the party and for China.
A: State-owned enterprises are political entities. They’re leadership is appointed by the party organization; the same people who appoint mayors and governors and party secretaries, etc. These organizations also have monopolies or quasi-monopolies and control market situations. When you’re doing business with them, you’ve got to remember that that person across the table doesn’t think like you do. They have a political agenda and a political career; they’re not pure business. Also, they when they come overseas here, they’re designated national champions to come out and grow global businesses for the party and for China.
In China, if rules don’t make sense, you don’t delete them or cancel them, you just ignore them and add some new ones
Q: Should western governments resist doing deals with Chinese State-Owned Companies?
A: There’s two ways to look at this. One is Chinese have a lot of money to invest overseas; the U.S. and Canada could use some capital right now, so that’s a good thing. But when Chinese companies can come and buy a car company or a bank or establish their law firm but foreign companies can’t do that in China, there’s a reciprocity argument. But then again, if you stick to the reciprocity argument, nothing will happen because the deals can’t take place.
A: There’s two ways to look at this. One is Chinese have a lot of money to invest overseas; the U.S. and Canada could use some capital right now, so that’s a good thing. But when Chinese companies can come and buy a car company or a bank or establish their law firm but foreign companies can’t do that in China, there’s a reciprocity argument. But then again, if you stick to the reciprocity argument, nothing will happen because the deals can’t take place.
If a Chinese company comes here and buys a company, they’re in your jurisdiction, your laws, your courts, so what’s wrong with that? As long as what they’re doing is going to help the economy of Canada, why not? China is state-owned companies and that’s going to remain the core of China, and some of them are pretty good.
Brent Lewin/BloombergJames McGregor says the biggest mistake of doing business in China is "being naive."
Q: Do you foresee a time when China moves away from socialism toward something that’s more centrist — a sort of meeting in the middle?
A: Well let’s hope it’s a meeting in the middle. China’s going to have to start playing by the world’s rules. In China, if rules don’t make sense, you don’t delete them or cancel them, you just ignore them and add some new ones. So, in order to get things done in China you go around a lot of the rules and that’s a core competency of China — how do you manoeuvre around this system that has so many layers of stuff that if you actually followed it all you’d get nothing done?
A: Well let’s hope it’s a meeting in the middle. China’s going to have to start playing by the world’s rules. In China, if rules don’t make sense, you don’t delete them or cancel them, you just ignore them and add some new ones. So, in order to get things done in China you go around a lot of the rules and that’s a core competency of China — how do you manoeuvre around this system that has so many layers of stuff that if you actually followed it all you’d get nothing done?
In dealing with the world, China is now bringing hometown practices overseas. They look at the WTO and they see all these rules and they say ‘okay, let’s see how we can get around them’.
Q: We often hear about the dangers associated with IP theft in China. Do you see the situation getting any better? Is there any movement on the government’s part, some recognition, that if there isn’t something done to protect foreign intellectual property within China that foreign companies will stay away?
A: IP is protected better in some cities. In Beijing, Shanghai, some of the more advanced cities have special IP courts. But they also have governments that want to attract tech companies. Also, more and more Chinese companies have technology they want to protect. But if you have a technology China wants, they will get it from you. Period. And you better have your eyes wide open on how you’re going to handle that equation.
A: IP is protected better in some cities. In Beijing, Shanghai, some of the more advanced cities have special IP courts. But they also have governments that want to attract tech companies. Also, more and more Chinese companies have technology they want to protect. But if you have a technology China wants, they will get it from you. Period. And you better have your eyes wide open on how you’re going to handle that equation.
Financial Post
Don't Do Business In China, Simple
Don't Do Business In China, Simple
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