Montrose Journal Summer 12


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RISK VERSUS OPPORTUNITY: A CHINESE ENTREPRENEUR SPEAKS... -

DR MINZHE ZHAO

Is China the place to invest?

With many businesses experiencing sluggish growth or even decline in recent years in Europe and Japan, China offers the chance of heady growth. After joining WTO, China has opened up its market of 1.3 billion people. Taking into account the purchasing power of those 1.3 million people and the maturity of the market, it must make sense for me as a Chinese returning from overseas to set up my business there. As a Chinese, I know all the many difficulties of doing business in China, but I still prefer to do business here, simply because I am familiar with this country, and I can take best advantage of the opportunities that exist to achieve the level of success I seek.

Why be an Entrepreneur?

There are many different flavours of entrepreneurship. Some people want to create something that will completely change the world, and they are willing to sacrifice everything for their business; others create a business to enhance their lifestyle. In my case, it is different but simple: I am creating a business to test my technical knowledge and skills and put them into practice. After studying and working in universities for nearly 20 years where I received my bachelor's, master's and PhD degrees, I have published three books and more than 80 technical papers. I have lost interest in being a paperwriting machine. My new interest is in designing and manufacturing products which originate from my knowledge and skills.

My Project in China

My project in China is to build up an industrial park located in Lianyungang City, Jiangsu Province. The complex is designed to accommodate IT and animation companies, fostering a city-based animation industry or enterprise cluster. The total investment for this project is about RMB 1.0 Billion (about 100m) with a total construction of 500,000. To facilitate the project, I founded my local company Kuga Animation Co., Ltd, which is committed to the design, development and marketing of original 3D animation products, such as 3D video, architecture roaming, virtual reality, graphic design, as well as cartoon derivative products.

The Challenges I Face

The opportunities for entrepreneurs doing business in China may be growing but so are the challenges. The biggest challenge relates to the local government, as they have a strong impact on the way in which the local economy operates. Combined with the fact that local government officials enjoy unfettered administrative power without transparency, it is a tough job to manage the relationship (guanxi) with the local government, even for many native Chinese, including returned Chinese like me.

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A business risk can be defined, according to Dr Zhao, as a circumstance or factor that may have a negative impact on the operation or profitability of the company. This might arise from internal as well as external conditions, ranging from sales volume, price per unit, input costs, competition, government regulations and the overall economic climate.

Generally speaking, business risk is influenced by numerous factors, which vary from year to year. The top 10 risks for 2009 in China, with the 2008 rankings for comparison, were:

1 The credit crunch. (Number 2 in 2008)

2 Regulation and compliance. (1)

3 Deepening recession. (New this year)

4 Radical greening. (9)

5 Non-traditional entrants. (16)

6 Cost cutting. (8)

7 Managing talent. (11)

8 Executing alliances and transactions. (7)

9 Business model redundancy. (New)

10 Reputation risks. (22)

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The reason for this is quite simple. China is still, to a great extent, a guanxi oriented country. Although many sectors of China's economy have become more market oriented, numerous restrictions and a massive bureaucracy still hinder full implementation of regulations and make the approval process unpredictable. Moreover, the interpretation of regulations tends to vary from place to place, and, in some cases, several authorities or departments are responsible for implementing the same regulations. The worst case is that the interpretation is decided by those senior officials' personal understanding and willingness.

'Number One' politics

In recent years, No.1 politics has increasingly become a reality. This so-called No.1 politics is a phenomenon of decision-making process between the local party committee and the associated government. For instance, the power structure of a city (or province, county, or whatever) is organised as the following (in sequence): Party secretary, Mayor, Deputy secretary, Deputy mayor, and so on. The Party secretary is the No.1 leader, owning absolute power both within the party and government; the Mayor, in most cities, can only play the role of personal assistant to the Party secretary, though he or she is the No.2 leader based on the structure. As such, a Party secretary is often described as the Party boss, e.g. Mr Bo Xilai in Chongqing. The term of appointment of a Party boss is 5 years, so that all party/government officials must line up with the new boss when he takes his duty. The No.1 leader has immense power to supervise his management team to promote the ideas in his favour over the territory of the city, so Mr Bo Xilai requested or maybe forced - people in Chongqing to sing old communist 'Red songs'. This is the phenomenon of "No.1 politics".

As an entrepreneur, I must not only pay attention to No.1 politics, I also have to consult all of the relevant authorities, and incur additional time and costs for doing so. The cost of doing business in China has thus turned out to be much higher than I had previously expected. Fortunately, the authorities are in favour of my project, so I can get various funds and subsidies from government to offset the costs. The only problem is that I have to work hard to start all over again, resetting up the guanxi, when there is a new party boss reporting for duty.

How to cope with the risks of investing in China

Though facing a number of risks and challenges in China, I am still confident of establishing my business in China. In addition to the deployment of appropriate strategies to prevent risk, I can also mitigate risks through local knowledge and networks. In recent years, central government has been urging local governments to make every effort to attract those Chinese who study or work overseas to join forces with local governments to improve the overall quality of the city-based macro-economy. According to official statistics, there are more than one million Chinese pursuing their higher education overseas, but only 30% of them have returned to China. Of these, there will only be a small number becoming entrepreneurs like me. We are not the major force in driving Chinese economy, but we are in a position to bring new technology and products to the Chinese market.

At the same time, I was advised before returning to China that the best way to avoid business risks would be to establish good guanxi with the local government, especially the No.1 leader and his senior city officials. The popular joke among entrepreneurs is that if you meet the party boss's requirements, you are sure to succeed. Besides, if an entrepreneur pursues investment strategies that fit with the priorities of the Communist Party, he is likely to avoid large deals that could draw unwanted attention and scrutiny from other branches of government. In other words, if I stay on the right side of the government, I can do almost anything in China.

Dr Minzhe Zhao is a former IT professor, now an entrepreneur


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