Titans of Trade

28a

Winston Churchill, with his gift for vivid metaphor, may have said it best. Speaking of Russia nearly 70 years ago, he inadvertently provided an apt description of modern China, at least as far as American businesspeople are concerned: “It is a riddle wrapped in a mystery inside an enigma.”

China is also a nation with an economy growing at 9 to 10 percent annually and a population of some 1.3 billion people eager for a taste of the good life—a tantalizing target for American companies. The United States government is equally eager to increase exports to China because we’re facing a historic trade deficit with that country and the rest of the world. We now buy much more from the Chinese than we sell to them, and we’ve borrowed so much from the Chinese government that our indebtedness to that nation is approaching $1 trillion.

China offers rich opportunity, but there are also many challenges. When two world powers with widely different cultures, governments, and legal systems want to meet in the boardroom, how should the courtship begin? “Very carefully,” says international trade expert K.C. Pang, M.B.A. “And many things must be taken into consideration before making that first step.”

Careful Communication

31aPang has been fascinated by issues of cultural etiquette for decades. Prior to joining the faculty of the UAB School of Business, he spent 20 years in the corporate world, overseeing sales and marketing operations in the U.S. and Asia-Pacific regions for companies such as FedEx, GTE, and Holiday Inn Worldwide. He often found himself coaching Americans and Europeans who were planning to travel to China—and whether their visit involved work or leisure, his advice was (and is) the same.

“Before you go, learn what you’re supposed to do—and especially what you’re not supposed to do,” he says, “because if you do something that is considered taboo, you can really get into trouble, and that means everything from insulting someone to actually going to jail.”

The main topic to avoid is politics, he explains. “You don’t want to say anything about the Chinese government’s policies. And while your hosts might sound you out about subjects like the situation in the Middle East, it’s best to respond in a very general way without criticizing your own government. But you can’t be seen as trying too hard to please, because then they will think you are weak. You must always be patient and diplomatic, especially during initial meetings, because that’s when they’re forming an opinion of your character.”

Perhaps the key point to keep in mind is that business relationships are approached quite differently in the two countries, Pang says. In the United States business usually comes first; if things go well at that level, then friendship may follow. In China, it’s the exact opposite: “Friendship and trust must first be established—which might take many meetings—and only then can you do business,” Pang says.

Pang once arranged a meeting between New York businessmen and representatives of a Chinese firm to discuss a potential partnership. “Toward the end of the initial conversation, one of the Americans said, ‘You know, at the end of the day, I think we’ll be able to arrive at an agreement,’” Pang recalls. “But the Chinese responded with dismay. They said, ‘How can we possibly reach an agreement today when there’s still so much left to be discussed?’ They didn’t understand that the American was just using a slang expression that anyone here in the States would relate to. You’ve got to weigh everything you say very carefully so that you don’t blow the whole deal before you’ve even gotten started.”

Dissimilar Systems

Global Glimpse
John Coffey obtained his M.B.A. from UAB after spending four years in China in the late ‘90s as vice president and general manager of ARCO Coal China.

Because of its increasing need for raw materials, China was interested in further developing its relationship with ARCO, which had already established an oil and gas division in the country. Coffey, who was the business development manager for ARCO Coal in the U.S., was asked to relocate—with his wife and five children—in order to set up a new coal division. The experience, he says, was both productive and profound.

“From a professional standpoint, I learned that you have to be patient and respectful when dealing with the Chinese,” he says. “You’re on their territory, and they work within a time frame that’s different from ours. Personally, it was a wonderful experience for my whole family. Our children were exposed to possibilities that exist beyond our own borders—they truly became citizens of the world.”

In addition to the challenges presented by language and cultural differences, the basic framework of doing business in China differs sharply from the business world in the United States. Lance Nail, Ph.D.—who is chair of the Department of Finance, Economics, and Quantitative Methods—says he has learned from conversations with hedge-fund managers who deal in China that “many of the things we enjoy under our judicial system, such as intellectual property rights and the legal protection of fixed-income asset cash flows, simply can’t be taken for granted over there.

“You’ve got to realize that this is a communist form of government,” he says. “They could nationalize assets at any point in time, and you would basically have no recourse.”
The protection against such a scenario lies in the fact that China is keen on economic expansion, “and if they lose the trust of their investors in the United States and in other major industrialized countries, then they’re not going to be able to reach their goal of growing their economy,” Nail says.

Foreign investors are restricted in terms of the type of stocks they are allowed to purchase, however. So-called “A” stocks are reserved for Chinese nationals, while investors from other countries are restricted to “B” stocks, which relegate them to the status of minority holders. This means that if a corporation suddenly decides to stop paying dividends, for example, “you really don’t have the voting power to do anything about it,” Nail says. “Here in the United States, disgruntled shareholders can mount a proxy battle to fight back, but you wouldn’t be able to do that as a ‘B’ shareholder in China, subjugated to the remaining voting control of the state and the ‘A’ shareholders.”

Of greater concern to many is the prospect of Chinese business entities acquiring American companies. “If a Chinese corporation were to acquire a company here in the United States, it would typically be restructured as a wholly owned subsidiary,” Nail explains. “The parent company would still operate under a system that isn’t subject to the full spectrum of American laws. And that’s especially problematic when we’re talking about strategic assets, such as oil and power-generation companies.

“We want to think of China as an ally, but we’re not sure of the exact nature of our relationship yet. And that naturally has a lot of investors concerned.”

Hard Labor

31bAnother concern is the low cost of manufactured goods produced by China, which gives the country a big advantage in international trade. Those low costs are made possible by the country’s relatively paltry wages. According to Edwin L. Brown of UAB’s Center for Labor Education and Research (CLEAR), Chinese workers have little choice in the matter.

“The All-China Federation of Trade Unions has a lot of members—137 million was the last number I saw—but it is not independent,” he says. “It’s controlled by the Communist Party, and within the local enterprises, the workers have no say in electing officers. Generally the head of the union at a factory is someone fairly high up in management.”

When two world powers with widely different cultures, governments, and legal systems want to meet in the boardroom, how should the courtship begin? “Very carefully,” says international trade expert K.C. Pang.

Known as “boss unions,” these organizations give workers little power. Instead of collective bargaining rights, which allow employees to push for higher wages, Chinese workers labor under what are known as collective contracts. “These are contracts that extend anywhere from one to five years, and in them the majority of the worker’s pay is based on productivity,” Brown says. “For example, an employee is usually paid about 40 percent of a set income, with the remaining 60 percent based on productivity, which is reviewed periodically. And if it’s determined that the worker hasn’t met certain production goals, then he or she can be dismissed.”

While workers are able to petition the government over unfair labor practices, the matter is ultimately handed back to the local union. And most of the labor-related disputes originate in the country’s urban centers, which account for only a small portion of China’s 800 million workers.

Brown says that the United States and other countries are partly to blame for these practices because of the examples they set. “You basically have two choices when it comes to management strategy,” he explains. “You can focus on innovation or on minimizing labor costs, and I think it’s fair to say that for the past 20 years, the United States has chosen the latter. So there would have to be a certain amount of reform in this country before we might see ripple effects in China.”

There is growing pressure from the United Nations, the International Labour Organization, and especially the World Trade Organization—to which China was admitted in 2001—for the country to embrace core labor standards such as the right to free assembly and for independent unions to be allowed to exist.

“China is a difficult country for us to get a clear picture of, mostly because it’s still a closed system,” Brown says. “But I think we’re now seeing a nation that’s beginning the transition from a planned to a market economy, and that may help level the playing field.”

Valuable Ventures

“We want to think of China as an ally, but we’re not sure of the exact nature of our relationship yet,” says Nail. “And that naturally has a lot of investors concerned.”

Despite the challenges, the game of global trade between the U.S. and China is gaining momentum. And because the rules are still being formulated, there is a world of opportunity out there. Pang—who is co-chairman of the City of Birmingham’s China Committee and an advisor to the Birmingham Chinese Business Association—says that China’s position as a developing nation means that it is in dire need of the technologies and expertise the United States can provide.

“There are certain ground rules that American businesses must understand, though,” he says. “First among them is that you can’t just set up a branch in China in order to sell your products or services. You should enter into a joint venture with a Chinese company—unless you are a multinational corporation, in which case the rules are different.”

The rules are also different for companies selling equipment that’s used to manufacture commodities. “The Chinese are looking for ‘value-added’ products,” Pang explains. “For example, they don’t want to buy cars. They want to buy the equipment used to make the cars, which will create jobs.”

But the country’s needs are many: “The Chinese need information and telecommunications technologies, and they need help developing their infrastructure, such as airports, seaports, roads, bridges, and light rail,” he says. “There are many health concerns in China, so they need medical knowledge that will help them deal with disease. And the environment is awful, so they need technologies associated with environmental protection—water-treatment plants and air-pollution controls. And because food production is so important, they need agribusiness know-how to help them increase their crop yields. All of these things are important, and the Chinese are very far behind, so this presents a wealth of opportunities for Alabama businesses to step in and help as China continues its evolution toward a productive and efficient economy.”

From Alabama to Anshan
(click to read about the student trip to China)

Pang understands that many people feel the Chinese are anti-American, but he says this is simply not the case. “They may not agree with America’s politics, but they love its culture and people,” he says. “And they especially love American businesses.”