China and the art of business

Modern-day compradors from all over the world are drawn to China by the need to out-source goods at low cost. China’s competitive costs have enabled it to emerge as a global manufacturing and processing base. FDI flows in the retail sector have actually compelled domestic industry to improve quality, making Chinese products even more competitive in the international market. What draws the Indian investor to China is usually the realisation that the Indian industry cannot rely solely on India’s domestic market. Nor can one expect to boost exports to the US and the EU without straddling the main economic currents that flow today between China and the Asia-Pacific region. For industries that rely on exports and seek to lower manufacturing costs, a presence in China has become an intrinsic part of any risk mitigation strategy.

The average Indian entrepreneur is often apprehensive that Indian companies looking to enter China solely to exploit the domestic market are unlikely to be welcomed by Chinese authorities. It is preferable to stick to the trading route if the primary focus is, indeed, the penetration of the domestic market. Establishing a representative office facilitates the task and operating costs are reasonable. This is better than being bogged down in investments that may encounter stiff local competition and have limited access to markets in other parts of China given the considerable infarction that exists in the domestic flow of goods and services.

India’s rapidly growing trade with China, worth $4.9 billion in 2002, is impressive. But, trade can be fickle and can plateau over time once high growth rates arising from low-base levels peter out. In fact, a higher GDP growth rate in the Indian economy may, ironically, have a suppressing effect on our currently burgeoning exports to China particularly once the manufacturing and processing sectors take off and domestic demand and consumption spiral upwards.

Western countries with lesser trade volumes than India enjoys with China tend to have a higher economic profile in China because of their considerable investments. This is inevitable because China requires the West’s technology for its continued economic progress. However, India too has high-tech products and a vibrant service sector that can participate in niche areas in the Chinese economy. Chinese companies are also beginning to view India as an important market for FMCGs and many are bidding for power, telecommunications and infrastructure projects.

Indian investments in China are relatively small, but growing. Different companies have adopted different models for engagement with China. Ranbaxy and Essel Packaging have JVs in China. Dr. Reddy’s Laboratories has a three-way JV with Rotam of Canada and a local partner. NIIT follows the franchise model whereas APTECH has a JV with the Beida Jade Bird Co. Aurobindo Pharmaceuticals has two JVs. Videocon has opened a design centre in Shanghai. ORIND Refractories has a wholly-owned unit. TCS has a 100 per cent owned software development company. Sundram Fasteners has become the first to set up a 100 per cent Indian-owned engineering unit in China.

The local bureaucracy understands well the importance of FDI and endeavours to facilitate clearances. Foreign investors benefit if they are part of the ubiquitous Government-backed industry clusters that abound in China. Industry clusters enjoy tremendous advantages in procurement of raw material as well as in manufacturing and marketing. A reservoir of patience and closely nurtured personal relationships can play an extremely important role in defining the outcome of business ventures in China.

The Chinese greatly value commitment and invariably take a longer-term view of things. It is best not to regard business forays into China as ‘‘one-off’’ events. Equally important is the need to acquire a local identity in order to fully avail of regional patronage and to overcome the internal trade barriers. In case of trade disputes, litigation usually proves counter productive. It is especially difficult to resolve trade disputes with a Chinese company after it has ‘‘lost face’’. A prime requisite for the foreign entrepreneur is flexibility. The insertion of appropriate arbitration clauses in contracts is usually a good back-up.

The networking principle in China remains strong. It helps to have a local influential partner in dealing with regulatory authorities. In general, 100 per cent owned investments are more suited to relatively smaller investments or those relating to exclusive products and technologies over which the investor wishes to retain fuller control. In such cases, the local authorities are usually content to have a prestigious high-tech project in their zone.

By and large, the special zones in smaller townships are more responsive to smaller investments and are in a better position to allocate land and other facilities on favourable terms. Acquisitions also provide an option of expanding operations in a graded manner. Essel Packaging has also used its acquisition of the Swiss company Propack Ltd, as well as a Chinese company, to add to its market share in laminated tubes in China.

(The writer is the Indian Consul General in Shanghai)