Home » China, Publications

How Westerners in China Can Fight Back

25 March 2010

by Daniel Michaeli

Date: 24 March 2010.

Publication: BusinessWeek.

Author: Daniel Michaeli.

The best strategy for dealing with Beijing’s chilly new business climate is not to copy Google’s example

No matter how tense commercial relations between the U.S. and China become, American corporations cannot afford to mimic Google’s (GOOG) mistake and give up huge growth opportunities in the world’s largest market. That’s why business leaders need to adjust their strategies quickly to stem the damage.

First, they must cultivate untapped sources of support within China, beginning with independent executives who also chafe at Beijing’s market-unfriendly policies. Coordinating a message with these leaders would change the narrative, removing the perception that greater economic openness means giving in to foreign pressure.

Some are already willing to join U.S. companies in public support of better Chinese economic policies. On Mar. 24, for instance, Bloomberg reported that Chinese executives including Yang Yuanqing, CEO of Lenovo (LNVGY), have gone public with their support of the currency realignment U.S. exporters need to be more competitive in China.

ALLIES INSIDE CHINA
One place to look for allies is among the private executives upset because they cannot secure loans from state banks that pump cheap money into state-owned enterprises. Case in point: Last year, Liu Jieyin, the founder of Okay Airways, complained about the unfair dominance of state companies to Forbes. And he said the business climate for independent firms was so bad that “if you asked me to set up a private airline now, I would not dare.”

American companies should also try to enlist help from state-owned enterprises that have an interest in open trade and investment. For example, the Commercial Aircraft Corp. of China (Comac)—which is making the C919, China’s first jumbo jet—recently signed a $10 billion contract for an engine made by a joint venture of General Electric (GE) and France’s Safran (SAF:FP). Comac is already taking orders for the C919, but whether the jet will be ready by 2016 as pledged depends on the successful execution of the engine contract. A worsening of the business environment could put such contracts, and even access to future export markets, at risk.

Despite the shrill rhetoric coming from Beijing, many government officials appreciate the concerns of foreign businesses. Some have long histories with foreign companies; others hope to restore economic openness for other reasons. They worry about stifling innovation and weakening the private sector, which has fueled growth for decades; creating housing and equity bubbles; and paying the environmental and public health costs of overinvestment. These worries were all raised publicly at the National People’s Congress meeting in March.

CHOOSE YOUR BATTLES
In addition to mustering support within China, U.S. companies must choose their battles more carefully. So when an attempted hacking raised the prospect of local competitors stealing trade secrets, Google should have focused on compelling authorities, perhaps by dangling the threat of going public about the hacking, to commit to protecting its intellectual property. Instead, Google threatened to leave China’s search engine market if search censorship wasn’t lifted—an impossible request of an authoritarian state. This action invited a hard-line response, failed to secure Google’s intellectual property, and will only hinder Chinese citizens’ access to information.

When threats are necessary, they should come from business groups with substantial combined leverage. U.S. companies manufacturing in China are collectively responsible for the livelihood of millions of Chinese workers. They also have the ability to build up the capabilities of regional competitors such as India. This gives them political leverage if they act in unison.

Market openness serves China’s long-term interests. It strengthens the country’s dynamic private companies and improves access to Western technologies. But it may take time for China’s leaders to realize that. In the meantime, U.S. companies need to challenge Chinese policies more effectively. If American businesses fail in China, they put at risk both U.S. economic competitiveness and the most important bilateral relationship of this century.

Links:

Tags: , , , , , , , , , , ,

If you liked this post, sign up for the Asia Ruminations FeedBurner feed, which makes it easy to add this blog to Google Reader, My Yahoo, or other sites; and the feed offers email notifications of new posts (no more than 2–3 per week). I am on Twitter as danielmichaeli.

3 Comments »

  • allroads said:

    Daniel,

    I find myself agreeing with oyu and disagreeing with you at the same time.

    In agreement, I would say that Google (and a few others) have a special place where if they take actions at this level it can have a real impact. Whereas others may be too small to have an impact, and any threat of “pulling a Google” may be met with a quick response of laughter and bad CLint Eastwood impression.

    Where I would disagree with you though, at on some level very strongly, is that firms need to begin operating with clear lines and sticking to them. you can argue that Google should have never come to China very easily, but a level of respect for their recent actions should be given as well. The conditions changed, and they made a decision that put their core values (moral lines) before their bottom lines… and we should be encouraging that as it is called leadership, and perhaps through more leaders like it, the relationships between the US and China would return to a more balanced foothold..

    There have been a lot of analysts out there who have questioned the intelligence of Google pulling out of the world’s largest market, and much of that reasoning is being used now as a defense of others, but at the end of the day there are firms who see that as a false argument. That, while China may be the largest market (or largest US treasuries holder), that there are times that warrant walking away from it.

    r
    http://www.allroadsleadtochina.com

  • Daniel Michaeli (author) said:

    Richard, I do actually agree with you that there need to be some clear lines, including in moral areas. (In the Internet space, moral lines are clear and especially important when individuals could be targeted based on what they say, but this wasn’t the issue with Google’s search engine.)

    This situation is terribly muddled because the immediate problem Google faced was of intellectual property theft, not censorship. So what was strange about this is that Google responded to an IP enforcement problem with a moral argument about censorship.

    Put another way, at a hypothetical level (because this would have been nearly impossible), what if the Chinese government had caved and allowed Google to lift its censorship of search results? Google’s core interest in the security of its source code, which had just been challenged by hackers, would still not have been protected. So my main point is that censorship and intellectual property rights are two completely separate issues, and Google’s interests were ill served by conflating the two.

    One could debate whether or not Google should have started to operate in a heavily-censored environment in the first place, but that is an entirely separate issue from how Google should have responded to hackers who tried to steal trade secrets.

    As I argued here, Google’s move will actually have a “chilling effect,” discouraging other companies from pushing the envelope on access to information in China. This is a morally gray area, but by entering the Chinese market and then allowing itself to be kicked out of the country, Google is making information access harder for Chinese people in the long run.

    Dan

  • Vid Beldavs said:

    The hacking of Google’s website was a criminal act that was not done in isolation many other business sites were hacked in the same time period apparently from the same sources that may possibly have originated in China. There was ample opportunity to raise complaints to the Chinese authorities about these criminal matters jointly with the other companies that were hacked as well as by itself. Clearly the criminal act should not have been confused with the issue of censorship to which Google had agreed as part of the conditions for doing business in China.

    China is a rapidly evolving society and much that is now allowed would have been unthinkable a decade ago. Stephen Chen, author of Red Circle: China and Me 1949-2009 illustrates the changes through the story of his own family how one of the wealthiest families in China went from being Red Capitalists in 1949 to being labeled “rightists” and “enemies of the people” during the Cultural Revolution. Subsequently by carefully listening to the signals from those in power and staying true to long term goals Stephen Chen successfully negotiated a string of major joint ventures with Chinese partners representing some of the leading companies in the US. In his next book Red Capitalists planned for release later this year Stephen Chen presents how successful private business can be built in the emerging Chinese business environment. “Fighting back” is a critically important subject and theme in Red Capitalists that Stephen comments “I firmly believe this battle will NOT be an easy one and will last LONG.” I would encourage you to listen to his Fox business interview on http://www.redcircle.me.