How China Will Change Your Business

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In late December, state-owned Changhong reported nearly half a billion dollars in losses, purportedly linked to unpaid bills owed by Apex. The scandal, though mired in murky details, nevertheless highlights both the ability of China's big firms to sustain losses and keep running and their willingness to satisfy American retailers' demands for ever-lower prices.

11. There are hidden costs associated with doing business in China. Companies that engage with China must expect pressure to transfer their technology and thus create their own competition in the country. The Chinese use the carrot of their vast market to extract concessions from foreign firms that will help build China's industrial might. It is a policy worthy of grudging admiration. When viewed from the Chinese side, it has a long record of success.

Motorola virtually invented China's mobile-phone market. Its corporate archives show that the company knew that eventually the transfer of technology to China would sow formidable rivals. Nevertheless, Motorola decided its best strategy was to get into China early and to bring its best technology. The proof today is in the size and efficacy of the country's mobile communications network: Calls get through to phones in high-rises, subway cars, and distant hamlets -- connections that would stymie mobile phones in the U.S.

What no one at Motorola anticipated was how crowded the Chinese market would become. Nokia and Motorola now battle for market share in the Chinese handset business. German, Korean, and Taiwanese makers figure strongly. And all these foreign brands are now facing intense competition from indigenous Chinese phone makers. More than 40% of the Chinese domestic handset market now belongs to local companies such as Ningbo Bird, Nanjing Panda Electronics, Haier, and TCL Mobile. The domestic makers have become so strong that when Siemens found its mobile handset business in China wanting, it joined with Ningbo Bird to gain both low-cost manufacturing and a developed distribution channel. Yet Motorola can't exit the Chinese market. If it did, says Jim Gradoville, Motorola's vice president of Asia Pacific government relations, the Chinese companies that emerged would be the leanest and most aggressive in the world, and a company like his would have no idea what hit it. So Motorola stays. Already the largest foreign investor in China's electronics industry, Motorola plans to triple its stake there to more than $10 billion by 2006.

12. Piracy is a problem. Foreign companies have little defense against even outright theft of their technology in China. China's failure to police intellectual property, in effect, creates a massive global subsidy worth hundreds of billions of dollars to its businesses and people. By investing in the country's manufacturing infrastructure, by providing the expertise, machines, and software China needs to produce world-class products, the world is also helping assemble the biggest, most sophisticated, and most successful "illegal" manufacturing complex in the world.

Seen another way, China's loose intellectual property rules turn the tables on the Western colonial powers and the Japanese who throughout the nineteenth and early twentieth centuries violated China's land and people. As China grows into a great power, the wealth transferred into the country by expropriating intellectual property will propel it forward.

13. China's heavy buying of U.S. debt has lowered the cost of money in the U.S. In the first half of 2004, China's total foreign exchange reserves topped $460 billion. In size, that puts China's cumulative dollar account at roughly equal to a third of its gross domestic product. If China simply spent its dollars, it would flood the world market with American currency and drive the dollar down. But China, no fool, is not interested in pushing the dollar down. So instead of selling its dollars, it lends them back to the U.S.

China keeps tight wraps on the value, composition, and trading of its portfolio, but Wall Street commonly assumes that the country owns a large amount of high-grade U.S. corporate bonds, intertwining its national fortunes with America's blue chips (many of them the same corporations reaping fortunes in China itself).

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