1. Why Invest in China? Hillman, Wertheimer, Yeap

2. Outline Background –Culture –Political System –Managerial System –Entrepreneurship –Financial Systems –The Investment Process Investment Factors –Strengths & Weaknesses –Opportunities & Threats Conclusions & Discussion

3. Background

4. Diamond Model Financial Systems Managerial Systems Entrepreneurship Political Systems Culture

5. Political System: Economic liberalization with limited political reform Constant state of flux & tension between reform and status quo –Desire to continue successful economic reform: stated objective to become “socialist democracy” –Trying to maintain tight control over political sphere: liberalization only to maintain power and popularity –Recent transition to fourth generation leadership – Hu Jintao & Wen Jiabao One-party rule by CCP –Executive, national & regional government are all appointed; with 9 person politburo as focus of power –Local officials are selected by popular election –Complex layers of bureaucracy pervade commercial and private life: role of SOEs and “units” versus growing private sector –Politics and commercial activity are tightly intertwined Source: Economist Intelligence Unit – Country Report 03/04

6. Political System: Economic liberalization with limited political reform CCP leadership faces key challenges: –Maintaining & managing strong economic growth, in face of changing urban population and disenfranchised rural poor –Managing unprecedented social & political change with losing power base: how much freedom can be allowed? –Increasingly internationalization of economy forces China to be more outward looking in their foreign policy, as well as meeting WTO obligations Foreign investors need to navigate changing and uncertain environment –Continued economic liberalization should make doing business easier Source: Economist Intelligence Unit – Country Report 03/04

7. Culture: Modern façade can cover strong cultural differences Key Cultural Differences: Community & group harmony –Strong agrarian roots Hierarchical with emphasis on relationships –Confucian heritage Holistic and circular analysis –Pictographic language –Educational emphasis on rote learning Wariness of foreigners –Emphasis on family & personal connections –Unreliability of “rule of law” Source: Harvard Business Review (10/03 – “The Chinese Negotiation” Graham & Lam

8. Culture: Modern façade can cover strong cultural differences Successful business negotiations requires understanding of underlying factors: Guanxi – Personal Connections –Social network capital & long-term reciprocity Zhongjian Ren – The Intermediary –Personal links to establish “trust” and dialogue Shehui Dengji – Social Status –Formality and hierarchy counts Renji Hexie – Interpersonal Harmony –Build relationships over extended periods Source: Harvard Business Review (10/03 – “The Chinese Negotiation” Graham & Lam

9. Culture: Modern façade can cover strong cultural differences Successful business negotiations requires understanding of underlying factors: Zhengti Guannian – Holistic Thinking –Evaluate each aspect of deal as a whole versus sequentially Jiejian – Thrift –Aggressive haggling over price Mianzi – “Face” or Social Capital –Making the person look good or not look bad Chiku Nailao – Endurance, Relentlessness –High degree of preparation & long bargaining sessions Source: Harvard Business Review (10/03 – “The Chinese Negotiation” Graham & Lam

10. Managerial Systems Use local knowledge to manage staff and risk Source: “The Great Transition,” Lieberthal and Lieberthal, Harvard Business Review, Oct. 2003. Vital to establish local country management with strong senior staff, to coordinate activities and show a united face for the company Understand management goals of the partner in a joint venture –JV company often looks to expand labor force Hire managers who can interpret and understand internal issues and devise strategies Avoid sharing sensitive technology and data – Chinese are good at pirating ideas

11. Managerial Systems Who is the ideal China manager? Source: “The Great Transition,” Lieberthal and Lieberthal, Harvard Business Review, Oct. 2003. During initial entry, an entrepreneurial manager – creative and flexible – experienced with international startups During development, a strong senior manager –good ties to home base, communication skills During a global integration, a global manager – comfortable working across business divisions

12. Managerial Systems Staffing the Chinese organization Source: "Guide to Doing Business in China(2003 Edition),” tdctrade.com Employees are found through two avenues: – job fairs – recruiting agencies Placing want ads is less common and requires local government approval Employees are usually hired with contracts – terms can be determined individually or collectively

13. Entrepreneurship Entrepreneurship suppressed by communism, more successful at small-scale enterprises Source:

14. Financial System Increasing liberalization but still volatile and high-risk Source:

15. Investing in China A how-to Get guanxi: show respect, network extensively, avoid jewelry and white items Pick a production region: find a location geared toward manufacturing, engineering, or sales Pick a distribution region: find a location based on internal distribution or export Hire staff that can manage the local initiative Guard intellectual property Sources: Hong Kong Trade Development Council; BusinessWeek

16. Investing in China Where to go? Source: adapted from BusinessWeek via Mike “Don’t call me Norton” Coppola

17. Investment Factors

18. Strengths

19. Weaknesses

20. Opportunities Be conscious of regional differences when making investment decisions Look beyond low-cost manufacturing for competitive advantage: –Engineering and product design capabilities –Enhanced language skills for service sector: data analysis, software development How you organize and manage your investment is crucial to your success –JVs versus WFOEs –Right managerial personnel –Strategy varies with phases of invesment –Need to be flexible

21. Threats Unstable political situation could spill over into commercial sector Structural inefficiencies plus overheated economy –Banking sector particularly vulnerable Intellectual property issues –Difficult to enforce across all regions, despite WTO conditions Rise of domestic players in key sectors make domestic market more competitive

22. Conclusions