FOR IMMEDIATE RELEASE
February 1, 2007
CONTACT: Susan Miller
317.816.9760
smiller@hickmanassociates.com
Indiana State University, Networks Financial Institute Host China Forum
The “why’s” and “how-to’s” of doing business with China
(February 1, 2007 – Indianapolis, IN) Indiana State University, Liaoning University and Networks Financial Institute presented China: A Two-Way Street on January 24-25 at the Westin in Indianapolis. The forum brought together best-selling authors, business leaders, government officials and academics to discuss the opportunities and challenges of doing business in the world’s fourth largest economy.
Panel discussions comprised of U.S. companies that are conducting business in China provided participants with practical, first-hand accounts of U.S./China business. Speakers included Ted Fishman, best-selling author of China, Inc. and keynote speaker Jack Perkowski, Chairman and CEO of ASIMCO, regarded as the largest Western-owned automotive presence in China. A summary of China’s current economy and financial systems presented by Paul C. Lo, Chief Executive Officer of SinoPac Holdings and Chairman of Bank SinoPac in Taiwan, rounded out the conference.
Since the cultural revolution of the late 1970’s, the world has witnessed China’s transition from a command economy to a market economy. Much of the expansion has occurred since 1990. In this relatively short time, China’s economy has grown to $2.3 trillion U.S. dollars, placing it behind the U.S., Japan, and Germany as the world’s fourth largest economy. Despite this accelerated pace of growth, China is challenged by a still-developing infrastructure, aging population, environmental concerns and public health issues.
Why Indiana Companies Do Business in China
Manufacturing continues to be the dominant industry in China, making it a natural opportunity for Indiana’s established manufacturers to leverage. Tires, vinyl, chemicals and vehicle manufacturing are all strong industries. Annually, China makes over 40 million gas and diesel engines for everything from automobiles to tractors and motorcycles. China ranks third after the U.S. and Japan in vehicle production; more than seven million vehicles were manufactured in China during 2006.
The consensus among panelists was that a presence in China is a necessity for many companies in today’s global economy. Steven Chapman, Group Vice President of Emerging Markets and Businesses at Cummins, Inc. noted, “Not entering China would be a disservice to our customer base, given customers’ price expectations. An on-site plant provides cost benefits especially important in today’s supply-side environment.” The tremendous undertaking of entering China need not disrupt an organization’s market share observed Jacqueline Simmons, Partner, Baker and Daniels and former Vice President, Reilly Industries Inc. She noted that Reilly Industries Inc. maintained its number one position globally in a niche market and that by meeting its building timeline, the company proved to customers that it understood what it was undertaking. The accelerated growth potential – Reilly Industries Inc. experienced a ten-fold increase in additional business within two years of entering China – makes “yes” the easy answer for manufacturing companies considering Chinese business operations.
Panelists pointed out that the proper question may not be, “Should I be in China?” but “Do I have the resources to be in China?” Much of the China Forum focused on what Indiana companies should consider when choosing to embark on a Chinese business initiative.
Expect Surprises
Despite the opportunities China presents, the developing nation presents challenges not often considered when establishing operations in more modernized countries. For example, Ms. Simmons noted the importance of establishing contracts with utilities regarding power expectations and notification of disruptions in service. “Expect surprises and constraints,” she said. Panelists advised companies entering the market to carefully consider China’s geography which is markedly different across the 31 provinces.
Protecting and Defending Intellectual Property
Intellectual property issues are a relatively new concept for China’s government. Prior to the cultural revolution, the Chinese government focused on getting goods into the hands of its citizens; today it must contend with protecting business owners’ intellectual property.
As the world’s leading producer of counterfeit goods, China’s black market costs legitimate companies billions of dollars in lost sales annually. International laws that enforce patents and copyrights in Beijing are often not similarly enforced at the local level. Some U.S. companies doing business in China have achieved greater trademark protection by using private investigative agencies to exert continuous pressure from within the communities where they operate, “There are no secrets in China,” noted Ms. Simmons. Several of the forum experts noted that as China has increasingly become a magnet for American companies, competitors’ access to trade secrets and intellectual property has become more difficult to manage. This is particularly true as companies compete in the war for talent. “
Retain Advisors and Experts
China’s mystique is an integral part of its culture. Companies who have initiated business in China characterized the Chinese culture as “gracious, inquisitive and relationship driven” with trust and respect very important during the contract negotiation process. Xing Yuanyuan, PhD, Liaoning University and Indiana State University visiting scholar, recommended utilizing a translator well versed in the local dialect. Aside from a language interpreter, she also advised utilizing a Chinese attorney to read and translate the legal verbiage of any contract. Local consultants and government support available through China’s economic zones can provide additional assistance. Panelists suggested selecting a single tax advisor to avoid additional fees due to differing opinions. Because the equivalent of a Dunn & Bradstreet credit rating firm does not exist, many experts advocated retaining a private investigative service when evaluating a Chinese service provider.
Workforce Issues
With regard to the work force, continuous quality improvement is still an emerging area. Businesses are beginning to make inroads into Six Sigma and other quality-driven initiatives. As Western companies have invested in China, there has been a surge in job creation and salaries. Coastal cities have seen wages increase 10 percent and higher. Turnover also is on the rise. While panelists expected U.S. companies’ earnings from China ventures to continue – Cummins expects its China revenue to grow from $1B in 2004 to $3B by 2010 – they did not foresee a shifting of jobs from America to China, similar to the transition of automotive jobs to Mexico. As China’s population ages, labor will be a critical issue. U.S. companies will no longer be able to count on China to provide the lowest-wage workforce. An increasingly college-educated workforce will continue to provide more skilled job candidates, particularly in the areas of engineering and science.
Environmental Issues and Other Challenges
Environmental issues are a tremendous concern in China, particularly with the approaching 2008 Olympic games in Beijing. The government has initiated stringent regulations to clean up the environment. For example, chemical companies have been required to incinerate their waste water. These environmental regulations can be a boon to Indiana businesses engaged in manufacturing technology that meets clean air regulations. Experts noted that environmental regulations differ dramatically among provinces.
Aside from environmental concerns, panelists and speakers cited corruption, income disparities, and public health risks as concerns China must address. China’s aging population will make it an interesting audience for pharmaceutical and medical companies.
Jack Perkowski –Guidelines for Doing Business in China
Keynote speaker Jack Perkowski, founder of ASIMCO, delivered a keynote address on his own 15 years of working and living in China. A former banker who left Paine Weber in 1990, Perkowski founded ASIMCO, regarded as the largest Western owned automotive manufacturer in China. Mr. Perkowski shared with attendees some general rules for working in China. First and foremost, he advised that businesses not be intimidated by the prospect of doing business in China; counseling that there is a “logic” to China. Secondly, he explained that China changes quickly in all areas; a contradiction to some perceptions that China’s heavy bureaucracy impedes change. Mr. Perkowski was particularly passionate about his third point – that for a Western owned business to be successful, it must have an actively involved, on-site management team. “Don’t delegate the research required to do business in China. Immerse your most senior management in the process,” he noted. Rather than applying the same management principles used in the U.S., Mr. Perkowski counseled U.S. businesses to adapt their management plans to the Chinese infrastructure. Likewise, Mr. Perkowski stressed a need for companies’ to establish a localized management team. Local management is particularly important in understanding both Chinese cost and customer service perspectives.
Looking to the future, Mr. Perkowski believes that China will transition from a low-cost manufacturing site to a nation characterized by technology. “China will move from replication to innovation,” he stated. He noted that China’s current model of rapid growth is not sustainable given environmental havoc, lack of oil reserves and an auto industry that is under tight pressure.
China’s Changing Economy
The second day of discussion focused on China’s economy and whether it could keep up or even drive the global economy. Keynote speaker Paul C. Lo, Chief Executive Officer of SinoPac Holdings and Chairman of Bank SinoPac in Taiwan earned an MBA from Indiana State University before beginning a distinguished career in U.S. and Asian banking. In 1999, Businessweek named Mr. Lo one of the “50 Stars in Asia.” Mr. Lo’s presentation was followed by a panel discussion moderated by Wei He, Assistant Professor of Management at the College of Business Indiana State University.
Mr. Lo expects the next decade to be characterized by tremendous entrepreneurial activity within China. In 2006, US firms invested $56 billion in China; with Chinese firms investing seven billion in U.S. business. He explained that China’s success will be driven by enhancements in technology and an increasingly educated workforce. Answering the title of his session, “Can China Catch Up with or Even Drive Growth,” Mr. Lo predicted that China’s GDP will catch up with the United States by 2030, reaching $28 trillion. China’s banking system is providing huge opportunities for foreign direct investments; however, loan quality and performance continue to be a challenge. Mr. Lo believes that 80 percent of China’s energies need to be directed to improving loan quality. Technology is another area Mr. Lo believes will drive Chinese banking; as consumers begin to trust electronic banking products such as ATMs and debit/credit cards. He explained that rates need to be deregulated to foster more competition. The majority of China’s banks are still controlled by four major state-owned enterprises. In closing, Mr. Lo counseled Indiana businesses to dream big and make a commitment to their dream.
A panel discussion followed Mr. Lo’s thoughts on China’s economy and that of its Asian neighbor, India. While China and India’s GDP’s are still well below other nations’, both lead the globe in terms of real GDP growth. China’s economy is characterized by dramatic foreign direct investments; more than $60 billion in 2005; whereas India’s foreign direct investors totaled less than $5 billion in 2005. Among the top global trading nations, China ranks third, with India a distant 18th. Four major banks – Agricultural Bank of China, Industrial and Commercial Bank of China, Bank of China and China Construction Bank significantly dominate China’s financial structure. Diversification will need to be a priority for China’s financial structure in the future. Seventy-three percent of China’s financial system is composed of bank’s assets, compared to India’s more balanced system. China’s relentless growth is also posing threats to China’s economic structure. Accelerated growth in fixed assets such as factories and machinery has resulted in overinvestment that may create production gluts and usurp corporate profits.
Panelists concluded by concurring that China and India both present private equity opportunities for Indiana firms. India’s democratic government and free press, however, must be considered with China’s significant infrastructure and investment in ports, plants, and transportation systems.
The China Forum was conceived following Indiana State University President Dr. Lloyd Benjamin’s trip to China in 2006. Indiana State University has had a long-term relationship with Liaoning University in Lianoning, China. Through a network of relationships, the two universities have partnered on several initiatives to advance the understanding of U.S./China business relations. “China is widely recognized as a nation of enormous opportunity for business. Yet twenty years after the cultural revolution, little is understood about the nation and how it does business. The goal of this forum was to take some of the mystique out of doing business in China,” said Dr. Benjamin. The university worked with its Indianapolis-based financial services outreach partner, Networks Financial Institute, to sponsor the program which attracted more than 225 attendees.
Panelists and presenters at the China Forum included Steven Chapman, Group Vice President of Emerging Markets and Businesses at Cummins, Inc; Allen Novick, Vice President of Marketing Intelligence and Support at Rolls-Royce; Mike Sergesketter, Vice President, Chief Financial Officer at Kimball International, Electronics Group; Jacqueline Simmons, Partner, Baker and Daniels and former Vice President, Reilly Industries Inc.; Xing Yuanyuan, PhD, Liaoning University, Angella Castille, Partner, Vice Chair of International Practice, Baker and Daniels, LLP; Zack Dong, Partner, Baker and Daniels, LLP; Kok-Chi Tsim, Senior Vice President and Relationship Executive, JPMorgan Chase; Marjorie Lyles, PhD, One America Chaired Professor of Business Administration; Xiao-Yan Zhu, President, CA International, LLC and Managing Director, Shenlin Corporation; Bill Tsang, Executive Director, Worldwide Corporate Strategy, Lenovo; Steven Akard, Director of International Development, Indiana Economic Development Corporation; Brooke E. Tuttle, President, LHP Technologies; John Clark, Senior Fellow, Sagamore Institute for Policy Research; and Indiana State Senator David Ford.
Networks Financial Institute at Indiana State University was founded in 2003 with a grant from Lilly Endowment. NFI strives to facilitate broad, collaborative thinking, dialogue and progress in the evolving financial services marketplace, concentrating on the areas of education, outreach and research. Headquartered in Indianapolis with offices in Washington, D.C. and on the campus of Indiana State, and offering outreach internationally, NFI’s goal is to serve as a catalyst for change in the financial services industry.
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