WORLD

Waiting for the Big One

ANNE GREGOR January 30 1995
WORLD

Waiting for the Big One

ANNE GREGOR January 30 1995

GAMBLING ON GROWTH

SPECIAL REPORT

Despite the risks, Canadian business is banking on big returns in China's emerging markets

CHRIS WOOD

Construction engineer Alain Dandurand stands in the damp chill and surveys the site of his company’s foothold in the China market. It is, at this moment, a particularly muddy foothold: drizzle has left the bare clay of the vacant lot in west-central Shanghai, where Magil Construction Ltd. of Montreal is building a $150-million commercial and residential complex, sodden and slick. Nearby, yellow and orange derricks drive piles into the city’s mucky subsoil to support a planned 44storey office tower, the first phase of a 36-month project financed by Hong Kong investors and designed by Vancouver architects Blewett Dodd Canada Ltd.

For Magil, the company’s first assignment to manage a Chinese building site has so far been a humbling graduate course in cultural adjustment. “When we first came,” Dandurand says, “I swore there would be no bamboo on my site. ‘It’s primitive,’ I said.” After 14 months, however, his assessment of the material, used for everything from scaffolding to hard hats, has changed. Dandurand now admires its flexibility. ‘We realize,” he adds now, “that it is not so easy to replace their technology with ours.”

Magil is far from alone on the learning curve. As more and more Canadian companies flock to the former Celestial Kingdom to seek deals in the wake of last November’s successful Team Canada trade mission to China—ringing up agreements worth $8.6 billion of potential business—the multiple challenges they face are becoming soberingly clear. “Securing the contract is the easy part,” Dandurand warns newcomers to China. “Executing the contract is the more difficult part.” The hazards run from a shortage of services and a plenitude of pollution in most cities, to the even murkier matter of contract law throughout China. Those problems are often compounded by both ingrained Chinese xenophobia and Westerners’ reciprocal ignorance of Asian business culture.

But those risks have only sharpened many companies’ appetites for corresponding rewards. With 1.2 billion potential consumers and an economy driving ahead at more than 20 per cent a year in the hottest urban centres, China, in the view of many analysts, represents the biggest single growth market on the planet.

Indeed, “for some companies, it is stupid not to be in China,” asserts Barry Macdonald, an accountant who is president of the Canadian Chamber of Commerce in Hong Kong, the most popular staging point for ventures into mainland China. Evidence of that sentiment’s widening hold is the Hong Kong chamber’s growing popularity: its membership jumped 25 per cent in the last she months of 1994 alone, to approach 1,000 companies and individuals.

Canadians, meanwhile, enjoy at least one edge over some other foreigners trying to clamber aboard the Asian colossus. In a climate in which the culture gap between East and West often poses the

most frustrating obstacle to a transaction, Chinese heritage can sometimes help to lubricate a deal. In a study released earlier this month, the federally funded Vancouver-based Asia Pacific Foundation described the nation’s estimated 586,650 ChineseCanadians as its “hidden advantage” in competition for China’s busi-

ness. And for a lucky few, the rewards are more personal: demand for individuals with the right combination of heritage and skills has driven some incomes to more than $300,000 a year.

Canadian ventures already active in China run a startlingly wide gamut. One group of Vancouver investors is raising money to complete a 300-km toll road south of Beijing, while another based in Toronto plans to build, equip and operate two Canadian-style ice-skating arenas in Shanghai and Chongqing, a city of 14 million in central China. In Jiangsu, in north China, citizens in need of a health tonic buy traditional ginseng brightly packaged in red and gold boxes emblazoned with a stylized Canadian flag; the roots are grown in British Columbia’s Lillooet Valley by Langley, B.C.-based Chai-Na-Ta Corp.

Meanwhile, a growing number of telephone calls made in the communications-strapped country are routed through switches made by Northern Telecom in Shekou, north of Hong Kong, or along fibre-optic cables turned out in nearby Shenzhen by Telos Engineering Ltd. of Richmond. “They don’t all have to be large projects,” observes Lucy Chow, a B.C. trade representative stationed in Shanghai. “A lot of entrepreneurs come over and just do it.” Cases in point: restaurateurs Reid Flemons and Trevor Magee cloned their two roadhouse-style Malone’s Bar & Grill restaurants in Vancouver to create a new Shanghai watering-hole aimed mainly at that city’s growing expatriate community.

The rarity of a truly home-style burger, even in China’s most westernized city, may augur well for the Vancouver duo’s success. For other investors, however, the Chinese experience risks turning out more like that of Montreal-based distilling giant Seagram Co. Ltd. At its sprawling redbrick and white plaster warehouse and bottling facility southwest of Shanghai, a limp Canadian flag looks down on neatly tended flower beds and an empty parking lot. Inside the echoing facility, one darkened room holds 12 gleaming stainless

steel tanks, each capable of holding 19,000 litres of the first beverage that Seagram tried to market in China: a wine cooler named Ping Lu. “The product was not successful,” admits director of operations James Stine dryly, adding, “the consumer was never really sure what it was.” After three years of disappointing sales, Seagram gave up on Ping Lu in 1993. According to Stine, the company is now “in break-even mode” with a more conventional line of liquors. But after five years in China and a cost of $8.8 million, Stine also admits that “we may still have five more years of learning ahead of us.”

Misreading Chinese consumers is one risk of doing business in the world’s hottest market; other risks are even more fundamental. In most Chinese cities, notes Macdonald, “power brown-outs are frequent. Getting clean water can be a problem. Getting a phone can be a problem.” Other critical business inputs can also be in uncertain supply. “We’re never going to have 100 per cent of our menu available,” acknowledges Malone’s Magee. “One day, we may have everything we need to make pizza. The next day, mozzarella cheese won’t be available for three weeks.”

Then, there is the gnawing uncertainty about whether a contract signed in China can be relied upon. For many, the short answer is: No. “It’s not uncommon,” observes James Che, a Chinese-trained lawyer who works for the Canadian firm of Boughton Peterson Yang Anderson in Shanghai, “for the Chinese partner to supply you with documents in which the terms are not compatible in Chinese and English.” Moreover, if a dispute develops over what Che calls the “very loose” language typical of most Chinese-drafted contracts, Western investors are handicapped in seeking a resolution. “Foreign

lawyers,” he notes, “cannot represent their clients in the courts.” At the same time, he adds, “it is very hard for a local firm to really work hard for you: they will face criticism that they are not representing the national interest.”

The apparent catch-22 reflects a

REPORT

dimension of the cultural gap between China and the West that is seldom raised in the bullish rhetoric of trade diplomacy: the country’s habitual suspicion of—and willingness to exploit—foreigners. Rooted in a 5,000-year history of isolation that once branded outsiders as “foreign devils” and “barbarians,” xenophobia persists today, even as Chinese consumers eagerly snap up American-made Marlboro cigarettes, European luxury liqueurs and Western-style fashions. Its most widespread expression is a pervasive double-standard in pricing and services that typically requires a gwailo (the term means foreigner and includes ethnic Chinese from outside the People’s Republic of China) to pay up to twice what a local would be charged for anything from an airline ticket to a kilogram of pears.

A lingering distrust of outsiders is evident as well in the tight grip that Chinese authorities maintain over much basic economic data. “At the Shenzhen stock exchange,” says Brian Powers, a Hong Kongbased Canadian journalist who publishes a newsletter tracking China’s nascent securities markets, “they have a press conference and reporters are not allowed to ask questions. Not only that, they’re not allowed to take notes.” Shadowy affiliations also characterize many of the so-called “companies”—virtually all state-owned in one way or another—offering themselves as joint-venture partners to Western interests. It is not uncommon for foreigners to spend weeks negotiating with a Chinese counterpart, only to discover that the individual lacks any authority to conclude a deal. Indeed, in at least one assignment that Vancouver architects Blewett Dodd secured in China, says partner Selwyn Dodd, “we have absolutely no idea who our real client is.”

Murkier still is the extent of blatant corruption in China. Two apartment towers in downtown Shanghai have stood empty for eight years, goes one unofficial story, because their owners refused to give one of the living units to the local gas authority—which retaliated by hooking the buildings up to a one-inch gas main instead of the required four-inch main. By some accounts, the scale of bribes being demanded has increased in recent years. “It’s not a gold watch any more,” observed one veteran Asia-hand based in Hong Kong, “it’s a Harvard MBA and a Mercedes.” But other observers call the problem overstated. Says Bin Lin, a Shanghai-born Canadian architect who works for Blewett Dodd to secure permits and approvals from that city’s building inspectors: “They don’t want very much, maybe take them to dinner or a Karaoke bar.” Adds Lin: “It’s not corruption.”

Underlying some misunderstandings between East and West, however, are real and enduring differences in culture. While the West, especially in North America, relies on the rule of law and contracts to rein in the behavior of a society of aggressive individualists, Asian culture, steeped in Confucianism, leans heavily on the unstated obligations of family and personal networks. “In China,” says Willow Liu, Magil’s local general manager in Shanghai, “we say, ‘First you become friends, then you do business.’ ” Adds Seagram’s Stine: “If you get to know people and you make a deal, you don’t need a contract. That deal is solid.”

Establishing that critical guanxi—Chinese for a good working relationship—is made easier when at least one member of a Western business team has Asian roots of their own. And it is no accident that many of the most successful Canadian ventures into China are led by people whose own background is in that country. Notes Telos’s Jack Mar, who immigrated to Canada from south China with

his family at the age of 7 and was raised outside Toronto: “I take full advantage of having grown up in Canada and understanding China as well.” It is an advantage that many more Canadian companies could seize. Noting that Chinese is the third-most-common mother tongue in Canada, the Asia Pacific Foundation, in a report issued on Jan. 13, declared Asian-Canadians to be “a strategic business resource,” for their cultural knowledge, language skills and transpacific business contacts.

As with any other commodity, however, soaring demand for the right combination of heritage and skills has driven up the price. “Ninety per cent of our business is ethnic Chinese placements,” notes Mimie Wu, the San Francisco-born Shanghai representative for Paul Ray Bemdtson Ltd., a Texas-based executive search company. But with an ever-growing number of companies competing for a limited

pool of qualified individuals, Wu adds, “compensation packages have to be fairly aggressive. The total package will easily reach $340,000 a year.”

Not even the most culturally astute of executives, though, can defend a company entirely against other risks of operating inside a nation of 1.2 billion people trying to shake off communism at the same time as they catch up with First World living standards. Although most observers discount the likelihood that future leaders in Beijing may try to reverse the current policy of reform, economic forecasts for China are not universally rosy. Among the several threats, any one of which could derail the country’s hectic growth and disrupt foreign investment plans: inflation, now running at close to 30 per cent in several regions; attempts to curtail inflation by limiting central government lending or closing down unprofitable state corporations; failure to repay the huge debts being run up by China’s massive investment in infrastructure; an environmental crisis (hardly a remote hazard in an overpopulated country whose major cities are routinely shrouded in corrosive smog); political upheaval following the death of 90-year-old ailing paramount leader Deng Xiaoping. With those clouds gathering on the horizon, asserts B.C. Trade Development Corp. president Oksana Exell, “the risk of doing business in China is increasing, and it is increasing exponentially.”

But so, in the eyes of many, are the opportunities. ‘You have to show your commitment to China,” observes Marc Sterling. The U.S.born lawyer spearheads Manulife Financial’s campaign to re-enter a market it first tried to crack a century ago. The Toronto insurance company wrote its first policy in Shanghai in 1893. But it fled the city—in the face of advancing Japanese armies—in 1941. To win its way back, Manulife reopened offices in Shanghai and three other Chinese cities over the past two years, even though Sterling does not expect to write another policy in the country until early 1996. Even so, if that investment secures the company a chance to sell employee benefit and life insurance policies to even a fraction of China’s 1.2 billion new consumers, he predicts, “that will keep us busy for the next hundred years.”

China, in fact, has always been a long-term and risky play. Marco Polo, who got there by camel caravan across central Asia, spent 24 years amassing the fortune in diamonds and sapphires that he brought home to Venice sewn into his clothes. Seven hundred or so years later, the Celestial Kingdom still demands endurance, at the very least, from its suitors, before it gives up its jewels.

CHRIS WOOD in Shanghai