How Western companies can succeed in China

Not too long ago, when Western CEOs pondered China’s fast-growing market and billion-plus potential customers, their eyes would fill with dollar signs. But these days, thoughts of China are more likely to elicit serious soul-searching, as some of the companies that eagerly dove into China have withdrawn.

Earlier this year, the car-hailing service Uber surrendered its China operations to arch competitor Didi Chuxing in exchange for a 17.7 percent stake in the combined company. Later this month, Yum Brands, the owner of KFC and Pizza Hut, plans to spin off its China unit amid growing competition in the food delivery business. Even Coca-Cola has announced its intention to refranchise its company-owned bottling operations in China.

Was the China dream just a mirage with Beijing simply using foreign ventures to import Western technologies and skills? Or is there a way to make money in the People’s Republic of China without giving away the store?

While finding success in the People’s Republic can be tricky, several Western companies have prospered – and even some of the companies that have “retreated” in recent years have profited handsomely from their China operations.

Partnerships and profits

While some research on joint ventures has tended to see success in terms of harmony, longevity and the “ability to create and sustain fruitful collaborations,” other research has focused more on the benefits of participation in a joint venture and company profits.

Unduly attached to the longevity of a partnership as a measure of success, several recent articles seem dismayed by the retreat of some American companies from China. Reconsidering the activities of such companies from a profit perspective, however, reveals a somewhat different picture than the one suggested by the headlines.

Of course, the idea that China is a dangerous place for outsiders has been around for a while. Jack Perkowski, a Wall Street veteran who founded a Chinese investment firm, famously dubbed China “the Vietnam War of American business” – because so many promising young careers were lost there.

In the 1990s, international brewers arrived in China like “stampeding wildebeest,” according to journalist Joe Studwell, opening 60 breweries and operating another 30 via licensing agreements. Not one of those 90 foreign breweries, however, is believed to have turned a profit.

Not so fast

The picture, however, is more mixed than the above stories and anecdotes suggest. While Bank of America, Yahoo and Uber all engaged in well-publicized retreats, such moves were far from disastrous.

Bank of America, for example, made headlines when it sold the remainder of its stake in China Construction Bank in 2013 after once owning as much as almost a fifth of the Chinese lender. The move was seen as a retreat at the time, but the eight-year relationship was certainly profitable for Charlotte, N.C.-based Bank of America, producing an annual return of over 10 percent.

Yahoo had a similar experience with Alibaba. Yahoo invested US$1 billion in Alibaba in 2005 and handed over all of its China operations in return for a 40 percent equity stake. It sold half back for about $7.6 billion in cash and preferred stock in 2012. Considering Yahoo still owns a sizable stake, its return looks pretty impressive.

Even Uber’s retreat is less than a total rout. Assuming a $35 billion valuation of the combined Uber-Didi Chuxing entity that remains, Uber’s 17.7 percent stake is worth about $6.2 billion. While this represents a haircut of nearly 25 percent from the $8 billion value placed on Uber’s China operations before the surrender, Uber stands to make more from its investment. In the two years before Uber decided to fold its operations into Didi’s, Uber lost $2 billion in China. Now, with the Uber – Didi price war in the rearview mirror, the future seems fairly promising for Didi shareholders like Uber.

On top of that, for a favored few, China has been a gold mine, and both Coca-Cola and GM represent examples of American companies that have achieved some version of the China dream.

Coca-Cola: From ‘bourgeois’ to dominance

Coca-Cola had an auspicious start in China a century ago, some trouble with Communists in the mid-20th century, and enormous success in more recent years.

The soft-drink maker had been successful in China as early as the 1920s. But Mao Zedong, who deemed the company’s fizzy brown drink a “bourgeois concoction,” nationalized the bottling companies after the Communist takeover in 1949. The company would have to wait nearly thirty years for another crack at the market.

That came in 1978, when efforts to reach out to state-owned import-export companies led to a meeting with the China National Cereals, Oils and Foodstuffs Corporation. After that, things moved quickly and rapidly led to a deal, helped by the Carter administration’s normalization of diplomatic relations around the same time.

Things did not, however, always go smoothly. Initially, Coca-Cola only received permission to sell to international visitors in foreign hotels and “friendship” stores in three cities, and the company lost a lot of money in the first two or three years shipping Coke from Hong Kong. In the early 1980s, the company was barred from selling its products in the country for a year.

Over time, however, restrictions on company sales were loosened, and the company began to see real growth in the market. From a shipment of 20,000 cases in January 1979, Coca-Cola was operating 13 bottling plants in China by 1993 and controlled 23 percent of the country’s carbonated soft-drink market by 1996. By 2010, it held a 60 percent share and owned 43 bottling plants in 2014. Today, the country is now Coca-Cola’s third-largest market in the world after the U.S. and Mexico.

GM’s late start

In contrast to Coca-Cola’s long history in China, General Motors is a relative newcomer to the People’s Republic – even compared with other foreign automakers.

While Jeep formed its first joint venture in China in 1984 and Volkswagen entered in 1985, GM didn’t make its first investment until January 1992. Even less auspicious, GM abandoned that investment three years later, before local production had even begun.

In retrospect, the key to GM’s long-term success in China would have to wait until the fall of 1995, when China’s leading car maker, Shanghai Automotive Industry, picked the company as its foreign partner in a billion dollar project to build sedans.

The deal was significant enough that then-Vice President Al Gore and Chinese Prime Minister Li Peng presided over the signing ceremony of the 50/50 joint venture in 1997, and by 1999, Shanghai GM was selling Buicks as fast as it could make them.

Since then, GM’s partnerships in China have thrived. In 2015, GM’s automotive China joint ventures generated roughly $45 billion in net sales and nearly $4.3 billion in net income, and the country accounted for 37 percent of its total vehicle sales. Despite being late to the party, the Shanghai partnership put GM on top of the pack.

How to understand China

Despite this kind of success, there have been frequent concerns raised in the press about the long-term costs of doing business in China, ranging from fears of regulatory fallout to the common allegation that Western businesses get pushed out once domestic companies are able to acquire and master key technologies.

Back in 1998, The Wall Street Journal reported:

“While the world’s biggest auto maker wants access to what one day may become the world’s biggest auto market, China wants the technology and training to build its own cars – and possibly compete with GM.

And others have gone further, suggesting GM – through its technical partnership with its Chinese partners – is gradually transitioning from a company that wraps its cars and trucks in the patriotism of "Old Glory” to one selling vehicles with “Made in China” stickers affixed on the bumper.

Having thought about China’s politics and business environment for a number of years, I think that being in China, when done right, can yield significant benefits. Moreover, if one believes that China’s renminbi is only going to get stronger, then there may be no better time than the present to invest in China. The tuition for learning about the place will never be smaller, the cost of mistakes will never be lower, and a long-term presence in the country may open the door to increasingly valuable sales over time.

Of course, there are many different factors that go into a successful investment decision, and it may be that Clint Eastwood’s character Harry Callahan was on to something. At a certain point, a CEO has got to ask him or herself one question: “Do I feel lucky?” Well, do you?

The ConversationJonathan Brookfield, Adjunct Associate Professor, Tufts University

This article was originally published on The Conversation. Read the original article.

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