I've long believed that Western companies have been far too hopeful about the potential of the China market, and the myth that untold riches await for those companies that are patient, shrewd, and connected.
The lure of hundreds of millions of potential customers has been a Siren call to generations of European and North American (and Australian) businessmen. Despite the wildly successful experiences of a handful of players, the majority of companies that have attempted to establish a beachhead in China have been frustrated by political unrest, cultural hostility or indifference, practical business hurdles, legal and government obstacles, forex complications, and a host of other problems.
A few years ago Ethan Gutman wrote Losing the New China: A Story of American Commerce, Desire, and Betrayal which, among other things, painted a picture of China branch offices of American companies and the American Chamber of Commerce deliberately promoting the myth, despite evidence that pointed to only limited profit potential.
I am starting to wonder, however, if the myth is starting to come true. I'm not just talking about U.S. investors who've made small fortunes on Baidu and other stock market darlings. I've seen reports in the Wall Street Journal and elsewhere that indicate a few large American companies' significant investments in China are starting to pay off, among them GM and Boeing. And it's not just because of cheap labor -- China really is starting to develop a middle class with middle class appetites. Then there's this report that a well-known venture capital firm named Sequoia has had a major change of heart over prospects in China.
But my skeptic's soul is warning me from getting to close to stories that suggest the myth is not a myth. Since the early 19th century, China has experienced regular and significant political and social upheavals that have ended the China dreams of many businesses. Additionally, while the Wall Street Journal, Amcham, and others like to highlight China success stories, we seldom hear about the multitudes of recent failures. There is no obligation for a Western company to admit to a failed venture or bad business plan in China; usually we only hear about them when the courts get involved. So until I see solid empirical and documentary evidence to the contrary, and significant political and legal changes within the PRC, I am going to continue believing that Western companies will have problems making a profit in China on a consistent, long-term basis.
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China introduced market reforms in the early 1980s; only a third of the economy is now directly state-controlled. Since joining the World Trade Organisation in 2001, China has rapidly become a global economic force, doubling its share of global manufacturing output, creating a commodity-market boom and gaining a vast middle class.
But not all of China is booming: rural areas are lagging. And growth has not been without hiccups. The banking sector reflects the murkier side of China's economy, while the capital market remains underdeveloped. The country desperately needs accountants to help Chinese companies meet international financial-reporting standards.
Still, the economy's recent growth has been seemingly unstoppable, raising concern that it may be overheating. In July 2005 China unpegged the yuan from the dollar—although American congressmen think the yuan still needs revaluation.
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