What does it take to succeed in China today?

What does it take to succeed in China today?

TARA PERKINS - FINANCIAL SERVICES REPORTER

TORONTO — The Globe and Mail

Published Friday, Oct. 15, 2010 5:58PM EDT

Years after former Canadian prime minister Pierre Trudeau went out on a limb and established diplomatic relations with Chinese Chairman Mao Tse-tung's regime, he got annoyed.

Ottawa had effectively built Canadian corporations a bridge into a wondrous world of opportunities. Mr. Trudeau didn't understand why more of them weren't crossing it.

He reached out to Paul Desmarais Sr., who was the chief executive officer of Montreal-based Power Corp. at the time.

"My father said 'You know what, you're right. You have led the way and we're going to follow behind you,'" Andre Desmarais, the current CEO of Power Corp., recounts. "That's what led him to set up his first mission there, and I was lucky enough to be his executive assistant, so I was on that trip and had the fun of preparing it with some other Power executives and others."

The year was 1978, and a who's who of Canadian business wound up making the trek, including Ian Sinclair, then the CEO of Canadian Pacific Ltd., David Culver, the head of Alcan, Robert Scrivener of Nortel, Cedric Ritchie, the CEO of Bank of Nova Scotia, and Petro-Canada CEO Wilbert Hopper.

The groundbreaking trade mission led to the creation of the Canada China Business Council, and promises to dramatically boost the amount of business that Canada did with China.

"That was a very fortuitous thing as it turned out, because it ended up being the first really senior trade delegation ever going there from any country," Mr. Desmarais says.

The relationships that Canada forged in the 1970s gave this country's corporations a head-start in what is now a full-on sprint to do business in China. But, as any company that has sought to enter the Chinese market can appreciate, the road was far from smooth.

Indeed, Power Corp.'s first real breakthrough didn't come until 1986. The company wanted to invest money in China, but it was nervous that another revolution might wipe out its investment. Thanks to the ties that it had worked at establishing, it was able to arrange a meeting with Deng Xiaoping, then the leader of the Communist Party of China, through CITIC, a state-owned investment firm.

"We suggested to them that what they should do is buy a plant in Canada - a pulp mill, a business that they need, a business that they knew," Mr. Desmarais says. "Then we would invest the same amount of money in China…

"The idea was that if there was a revolution in Canada, they could take our assets in China, and if there was a revolution in China, we could take their assets in Canada."

It's a tripartite lesson that many business people have learned: to succeed in China, relationships, patience and trust are paramount.

Following those talks, CITIC made its largest investment to date outside of China, buying a half-interest in a pulp mill in Castlegar, B.C., in a joint venture with Power Consolidated (China) Pulp.

The investment was a major breakthrough for Power Corp., and marked the beginning of a series of deals that each turned a profit, but the company learned lessons along the way.

"I went back so discouraged so many times you wouldn't believe it," Mr. Desmarais says.

In the early days, the company was offered the chance to buy a piece of land right next to the Forbidden City. Chinese officials were adamant that it had a bright future. "This was 1978, we said, 'It will be at least 50 years before that will ever happen.' Well, we couldn't have been more wrong," Mr. Desmarais says.

When Power Corp. had the chance to team up with CITIC and develop a plot of industrial real estate in Pudong, it took it.

"One of the things that I've learned about China is be very very careful, because there are a million arguments about why they can't do something," Mr. Desmarais says. "For many years I doubted them a lot, saying 'There's no way they can achieve these plans at the speed at which they're able to achieve them.' But I think I've found, with the history of having to be able to go so often, that they have a fantastic planning system, they have tremendous determination, they have courage, and a huge amount of brain power to achieve their goals."

These are lessons that Power Corp. has been able to impart to other Canadian businesses. Over the years, it has paired up with a number of companies to smooth their entry into China - and make money, by selling its investment in the ventures to the other firm once the project is established.

For instance, Power Corp. partnered with Bombardier Inc. on its original train deal in China, Mr. Desmarais noted. The companies worked together to win the contract. Bombardier then built the trains and bought out Power Corp.'s stake in the joint venture that the two firms had established with China National Railway Locomotive and Rolling Stock Industry Corporation.

"It took some time, I don't think we saw any significant business until four or five years ago, so it required a lot of patience," says Pierre Beaudoin, CEO of Bombardier Inc. "Because we believed in the long-term growth potential, we invested a lot to build relationships there."

For Bombardier's businesses, China is the country where Mr. Beaudoin sees the most growth potential of any in the world. And that means that Bombardier's relationship with the Chinese government is of the utmost priority, because items such as trains and planes are largely bought by state-owned companies.

"In many ways in China it is very clear who is the customer," Mr. Beaudoin says. "It is a communist country, the government does centrally control decisions."

While that might have been self-evident to Bombardier, not everything was.

"The challenge is understand, understand, understand," adds Jianwei Zhang, the president of Bombardier China. "Be clear. Understand the needs of the customer, understand the Chinese needs."

He recalls being asked by a Chinese customer why there wasn't a return clause in the contract for a train, enabling that customer to return the train to Bombardier if something was wrong with it. "For them it was very difficult to understand that you can't return a train," he says. "In practice, it's impossible. If there's a problem then you correct it, but how do you return a train?"

Another anecdote: a few years ago Bombardier executives were ready to sign a contract that had been under negotiation for several weeks. Just before the signing ceremony was scheduled to take place, they stumbled upon the realization that the two sides had different understandings of when the delivery date would be. The problem stemmed from a mistranslation of the English word "shipment." Bombardier's negotiating team thought that referred to the delivery from its facility to the port, while the Chinese translation was that the trains were put on the ship to China at that time. They had to renegotiate.

There are other hurdles. Chinese companies in a number of industries have quickly learned from their foreign competitors, and they are increasingly forces to be reckoned with. Bombardier's main competitor in China is now a Chinese firm. It can deliver an order in months, not years, and has lower costs, by cutting corners.

Bombardier has more than 4,000 employees in China now, and by and large it requires them to understand both Chinese and English. As a result, its labour costs are higher than its Chinese competitor.

But the immensity of the Chinese market means there's enough business to go around. And for all of the energy that they've poured into China, Canadian companies are starting to reap rewards.

Nevertheless, most still describe their ventures in the country as investments for the next generation.

"China is a long-term play for us," says Bob Cook, who heads up the Asian business of Manulife Financial, which has made tremendous inroads in China's insurance and wealth management industries. "The contribution to the bottom line is not going to be huge in the next few years, but I think our shareholders know that. I think they know that what we're trying to do here is lay a foundation."

Manulife broke into China in the mid-'90s, and worked to hard to promote the still-relatively-foreign concept of life insurance. Manulife-Sinochem Life Insurance Co. Ltd. is the first Chinese-foreign joint venture life insurance company established in China. Former Chinese premier Li Peng and former Canadian prime minister Jean Chrétien attended an opening ceremony for the company in 1996.

Manulife executives quickly learned that while labour might be abundant in China, professionals who could work in the life insurance business were not.

When Mr. Cook came to Asia, he says "I told my colleagues back in North America, 'You guys are engaged in a mild skirmish for talent, the real war is going on out here in Asia.'"

What Manulife realized it had in its back pocket were employees with a Chinese cultural background who happened to be living in eight different countries. It was also able to move some sales people from its operation in Taiwan to China, taking advantage of their language skills.

"Long term, in order to feed the ongoing growth of the business, you have to be able to develop local talent," Mr. Cook says. It's a sentiment shared by Bombardier, which invests a significant amount of money and resources into training Chinese staff.

Manulife-Sinochem is now in more than 40 cities, but it's been tough slogging. "In places like India or elsewhere in Asia, you can get a national licence and expand at the pace you want," Mr. Cook says. "One of the business challenges we've had in China is that you have to secure licences on a province-by-province and then city-by-city basis. That means you don't just establish and work with one regulator in Beijing, you're working with regulators throughout the entire country."

Canadian executives say that Ottawa's relationship with Beijing is crucial. "We love it when there's things like the Minister of Finance comes over to visit, because that often is just the last little push we need to get the approval in order to expand our business," Mr. Cook says.

In March of this year, Manulife bought a 49 per cent stake in what is now called Manulife TEDA Fund Management Co., an asset management firm. For Mr. Cook, that deal is the most exciting thing that Manulife has accomplished in China thus far.

"The reason we won is because of the investment we've been making over the last 15 years in partner-relations and in government-relations," he says. "We paid a full and fair price, but price alone was not why we won the deal. It was the investment we had made in relationships in China that we were able to leverage in order to get this deal."

Marc Sterling, who was hired by Manulife 17 years ago to get the company into China and who is now the chairman of Manulife-Sinochem Life Insurance Co., says the realization that Manulife had made it in China dawned on him about three years ago.

That's when Chinese officials allowed Mr. Sterling to take a four-hour drive with a police escort - and sirens wailing - to the Wolong Panda Reserve, where he and his family were allowed to play with six giant pandas.