By: Matthew Wisla
Richard Nixon. The Watergate scandal is his legacy, but we also remember him as the president who opened China to the West. Even in 1972 as final
preparations were being made, everyone knew Nixon was making history by going to China. Witnesses say electricity was in the air as the president departed the White House mingling with throngs of lawmakers, administration officials, well-wishers and cameramen. Some said it was something like the moon launch three years earlier, and aids describe the surreal experience of watching their own departure as Air Force One roared down the runway on live television. The excitement was understandable, after all, they were flying all the way to China and Nixon was going to meet Chairman Mao.
What no one knew at the time was whether a trading relationship could ever be established with the Chinese. The carefully planned visit would open diplomatic ties, Dr. Henry Kissinger made sure of that. But could the relationship be broadened to include a commercial pillar? Flying back to the US in 1972 when some administration aids started speculating about what we could actually buy from China there were blank stares and head scratching all around. The best they could come up with was hog bristle brushes. They thought the Chinese might be able to sell some of those to us.
Fast forward to the present and the answer is obvious. Bilateral trade between the US and China is well in excess of $1.5 billion per day, with more than $403 billion in total goods sold between the two countries through September 2013.
Big Things to Come
While the current commercial relationship was beyond anyone’s wildest dreams forty years ago, today’s China can be a nightmare for US companies doing business there. Top business challenges include rising labor costs, protectionism, an inconsistent regulatory environment, licensing barriers, shortages of qualified employees and managers, and corruption, according to the latest surveys by the US-China Business Council and the American Chamber of Commerce in the People’s Republic of China (AmCham China).
Regardless of its challenges, the appeal of the China market remains strong for American companies. According to US-China Business Council estimates, China is currently a $250 billion market for US companies, and growing. AmCham China member companies report that three-quarters of those responding to the survey have an “optimistic” to “slightly optimistic” two-year business outlook in China.
Yet in the early days of the economic relationship, only the Americans had a clear picture of what international trade was all about. For the Chinese, Mao’s Cultural Revolution (1966-1976) was still gripping the country during Nixon’s visit meaning universities along with their business schools were shuttered and the very idea of capitalism was a state crime. So for the future businessmen and women who lived through that time and into Deng Xiaoping’s era of reform and opening in the 1980-90s it’s hard to imagine what came to mind when they thought of international trade and capitalism.
The Nobel Prize winning poet Wislawa Szymborska once wrote about what it might be like reading poetry to the blind. Through what frame of reference could a sightless person relate to the poet’s familiar use of colors and imagery? American companies that made their way to China during those early years could probably relate to Szymborska’s poem. They were encountering government officials and a small business class with little understanding of the outside world or business as we know it. As Szymborska wrote, speaking of the poet, “He hadn’t guessed it would be so hard.”
Today, the Chinese business community has a well-earned reputation for savviness and American companies are a major presence on the ground in the China. Most US businesses with any international exposure to speak of now have extended track records and expanding operations in China.
US companies like P&G, GM, Intel, Honeywell, Amway, United Technologies, Apple, Boeing and many others view China as a critical market. Construction equipment manufactures like Caterpillar, Volvo, Terex and Oshkosh have significant investments and important, growing operations in the middle kingdom. For example, Caterpillar has more than 20 manufacturing facilities in China.
Research and development centers of American companies in China regularly innovate new advances as well as working in concert with R&D centers worldwide to create the latest products. It’s not unusual for new products to be launched in China before being rolled out to the US and rest of the world. Institutional investors regularly question CEOs about their China operations, and some companies, like Honeywell, have relocated division headquarters into the region.
Gone are the days when China functioned solely as a low cost manufacturing base for companies looking to make things there for sale elsewhere around the world. According to the latest AmCham China member survey, 71-percent of responding companies say their main goal in China is to produce goods for the local market.
Despite the global downturn, revenue and profitability are good in China. According to the AmCham China survey, more than 40-percent of respondents say operating margins in China are better than the global average for their company. That’s good news for American shareholders.
In early December, Vice President Joe Biden flew to China on what was originally intended as a trade mission. Instead it focused mostly on regional security and the roiling dispute between Japan and China over a chain of islands in the South China Sea. Nonetheless, Biden made time to discuss trade issues with the Chinese and met with the American business community at a gathering in the St. Regis Hotel in Beijing. Biden said in his talks with Chinese officials he stressed the need for more legal transparency, bilateral investment, intellectual property protection and market-driven exchange rates.
Biden’s comments were well received by business leaders. “We are very encouraged by the vice president’s visit to Beijing. We believe there are numerous opportunities for companies in both countries to benefit from greater cooperation, in particular through open investment policies and transparent regulatory frameworks,” said AmCham China Chairman Gregory Gilligan.
“I was happy he (Biden) didn’t dance around the issues,” said Ken Lousberg, President Terex Corp. China.
Biden also commented on the connection between the diplomatic and commercial pillars of the US-China relationship. “I believe that the shared prosperity that you helped create is part of the glue that will hold together this relationship,” Biden said. “Your success strengthens the entire relationship.”
The China Imperative
Nonetheless questions are often raised in the US about the need for a business presence in China. Beyond last quarter’s profits and some positive trends, corporate leadership as well as growing numbers of small- and medium-sized companies emphasize a range of strategic reasons for their China engagements.
Anyone who says – and it’s surprising to still hear this in business circles today – that companies are in China because it’s a big market is dead wrong. CEOs devote significant time and energy to thinking about risk and growth. The business rationale for China, and the imperative many companies feel for getting China right, has to do with scale. Size is good, especially when it equates to more sales and revenue, but scale is a relative measure that takes competition into account. And competitors can put you out of business.
Companies intending to remain among the Global Fortune 500 in the future or to continue as leaders in their particular niche look to China to hold or maintain their positions as China drives the global size of industries across the board to new heights. At the same time, Chinese companies are growing strong at home before branching out to global markets. As it turns out, rising completion is part of a global trend. For example, by 2025 about 50-percent of the world’s leading companies are expected to come from China and emerging markets. In 2000 only five-percent came from emerging markets.
With that in mind, US companies point to a need to compete with and keep tabs on their rising Chinese competitors on their home turf. It would be a risky proposition for an American company to ignore China allowing competitors to gain scale and momentum there before challenging in the US.
China is of particular importance for capital intensive industries, like automotive. Companies in those sectors know that missing in China means they won’t have the volume necessary to amortize the huge cost of developing new models and products in the future. And not having the capital to innovate leaves the door wide open to the competition.
Finally, there are important growth drivers in China that are absent in the US. For example, 60-percent of the world’s population are expected to live in cities by 2030. China is an important part of this trend since 250 million people will move off the land and into Chinese cities over the next ten to 12 years. That’s the equivalent of creating a Manhattan’s worth of new consumers every year. What company can afford to miss that if they are in a relevant industry? What answer would an American CEO give to investors after the company was eclipsed by European or Chinese competitors?
In 2011, New York’s Metropolitan Opera staged “Nixon in China” complete with a replica of Air Force One and a stage full of baritones and sopranos taking the parts of Mao, Nixon, Mrs. Nixon and a host of other historical figures. John Adams wrote the musical score (a contemporary composer from New Hampshire, not our second president). In the final act, Adams arranged the singers and music into a seamless woven texture connecting the Chinese and American characters. It symbolized how everyone who participated Nixon’s visit, and those coming after them, were going to be forever intertwined. As we look towards the New Year, there remains a powerful business case for our strong interconnection with China.
Matthew Wisla recently returned from nine years in China helping American companies succeed in one of the world’s most demanding and challenging markets. He co-founded the Marketing, Advertising and Public Relations Forum for the American Chamber of Commerce in Beijing and later served as the organization’s Vice President of Communications. Previously he worked in the US and Beijing for the leading global communications consultancy Fleishman-Hillard. His expertise includes brand building and managing corporate reputations, as well as issues and crisis management and policy communications.