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Winter 1997 - Volume 2, No. 3

Doing Business in China for 1997 to 2001: A First Impression
by Dr. Richard S. Redditt
Professor, Russell Chair of Manufacturing Excellence, Middle Tennessee State University

China is a developing country in desperate need of capital investments and newer technologies to help springboard them into the world economy. The major business strategy in China today is the Joint Venture (JV), which is widely used to attract foreign investors. In order for the JV to be successful, however, it must include significant involvement from Chinese investors, including their support of the business permits.

Additionally, while visiting with a U.S. Department of Commerce representative at the US. Embassy, I learned that any company planning to start a business in China should expect to lose their entire investment if the business policies of the central government change.

In China, it is traditional for the prospective business partners to have several meetings to get to know each other, before beginning discussions of the business plan. After agreeing to do business, a contract for the joint venture is developed for both parties to sign. In the U.S. this would be a binding agreement, but in China this is simply an indication that business has started. In my opinion, this suggests that the U.S. partner cannot leave the table expecting that all points of the initial contract will remain intact.

During September 1996, I spent three weeks in China, visiting and working in Beijing, Wuhan, and along the Yangtze river at Three Gorges and the Lesser Three Gorges. In Beijing, I was the guest of the Minister of Water Resources, the Governor of the State of Tennessee and the Tennessee Valley Authority. In Wuhan, I was a visiting professor at Wuhan Transportation University. While traveling up the Yangtze River I saw the beginning stages of the Three Gorges Hydroelectric dam which will have 27 electric generators along its two banks when completed. It is estimated that several complete cities and over 1,000,000 people will be displaced when the flood gates are closed, but the dam project will also reduce serious flooding problems down river.

Observing and experiencing three different parts of the country gave me a broad perspective on economics in China today. These three parts of the country regions have very different economic climates. In Beijing, the national capital, our conference group was hosted by a minister of the central government and was given a grand reception. Wuhan is a growing city about 700 kilometers inland from the capital and while there I was a guest of the university community. Traveling along the Yangtze River to Lesser Three Gorges, I saw riverside vendors who live in dirt caves in the mountains along the upper tributaries of the Yangtze River.

I had opportunities to view the business community at work in these various places and found traditional American business practices somewhat difficult to translate to this environment. For example, in China there are almost no data on the demographics of the population and the existing is kept secret by ministries of the central government. While we outside China have information on Chinese population levels, we know almost nothing about the economic status of the Chinese people. Almost all jobs for major companies and include housing in company-owned apartment complexes and transportation on company-owned busses. Very few people have personal telephones, although some are now using cellular phones in the major cities and many people use beepers as the best way to communicate. Because there re few personal telephones, there is no need for phone books, which we in the U.S. use for market research. There are no business listings, either by region or business type, for comparisons of competitors. There is limited disposable income for purchasing goods and services.

I also had the opportunity of discussing business plans with a venture development group in Wuhan. This group is on a fast track to success and does not have time for the traditional approach to doing business in China. In one evening, through a series of meetings and dinner, I was offered the opportunity to develop an entire business plan for a high technology business, to garner local venture funds, to choose a building site, and to be guaranteed favorable considerations by local officials who would gain approval for all necessary documents. My responsibilities would have been to provide the joint venture company in the United States, to choose of nature of the high technology business, and design, deliver and analyze a market survey for the selected business. Unfortunately, the Chinese could not provide me with any market data or demographics. What is really needed is on-site monitoring of the data gathering and analysis, prior to starting the venture company.

Utility infrastructure is missing parts from the Chinese business community. Availability of electricity is very limited; there are few electric poles for distribution. Also, there are few hard-wired telephones; very few INTERNET connections; poor roads and almost no divided highways allowing high-speed travel; and few sewer systems or public toilet facilities.

This lack of what we consider to be "basic utilities" is significant to the cost of doing business American-style, which requires electricity and telephones. For example, an automotive manufacturing plant in Beijing pays an extra premium for kilowatts of electricity on demand to keep the plant on schedule. All major plants using electricity are assigned specific days of the week when they must shut down in order to route the available power to the various sites.

I was surprised to see so many people downtown on weekdays, until I learned that the work force is on rotating schedules and there is not a standard " weekend." Companies using manual labor operations during daylight hours have some advantage at the present time and will until the Three Gorges Dam is completed and the generated electricity is delivered to the needed sites.

Professor Richard Redditt, holder of the Russell Chair of Manufacturing Excellence at MTSU, has thirty years of experience in education and industrial manufacturing, including owning an engineering design and consulting company. Dr. Redditt was a member of last September's delegation of educators and business people which traveled with Governor Sundquist to Beijing to attend a conference with government officials on Chinese infrastructure development. A related purpose of the journey was the building of relationships between China and Tennessee's businesses and educational institutions.

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