Success in China
Or the Absence of Failure
Dr. Stephane J. Grand
The limits of experience
• Your Instructor
• What you will learn and what to do with it
–
–
–
–
The fundamentals: there is indeed a Chinese culture
Application: working with the Chinese
Application: investing in China
Application: navigating and troubleshooting daily
business
– Futurology: Strategies for the long term
• Keep in mind:
– Political Correctness, or how to refuse to learn
– Limits of Experience: reconnecting theory and practice
Success in China is the absence of failure
Success, Failure and China
• I do not need to convince you China is
important
•
•
•
•
•
•
1.35 bn. people (2012 UN est.), 95+% literate
2nd economic power in the world
7.8% growth rate (2012, est.)
2.057 tr. USD exports (2012 est.)
1.735 tr. USD imports (2012 est.)
3.3 tr. USD foreign exchange reserves (end 2012)
• What makes the first cut of success or failure of
a foreign company in China? Thinking it is a
Western country.
Success in China is the absence of failure
What you need to walk away
with from today’s lecture
• China is not a country as you understand it
• There is no truth in China
• Friendship, contracts, trust are different
concepts there
• There is no authority, there is only power
• The history of the people you do business
with in China is different from this of anyone
you know in the West
Success in China is the absence of failure
Why this matters
• The above has a tremendous impact on:
– The relations with customers, suppliers and
business partners
– The sensible and efficient mode of entry on the
market
– Contractual and general business risk
– Intellectual Property Rights (IPR) and their
protection
– Strategy
Success in China is the absence of failure
The Chinese in the Last 60
Years
Recent History
• Timeline of Modern China and the lives of your
counterparts
1949 – Liberation from foreign powers, birth of the PRC
1953 – Anti-rightist campaigns – end of private property
1957 – Launch of the Hundred Flowers Campaign (open
criticism, followed by violent crackdown)
1958-1962 – Great Leap Forward (widespread famine, 20+
million deaths)
1966 – Beginning of the Great Proletarian Cultural Revolution
(political violence at an unprecedented scale)
1976 – Death of Chairman Mao Zedong, end of GPCR
1978 – Downfall of the Gang of Four, rise to power of Deng
Xiaoping
1981 – One Child Policy (beginning of forced abortions)
1989 – Tian An Men events (June 4th)
1989 to now: continued economic growth under CCP
supervision – Acceleration of reform (Bonsai theory)
60
50
45
35
25
Success in China is the absence of failure
1960s
Success in China is the absence of failure
1970s
Success in China is the absence of failure
1980s
Success in China is the absence of failure
1990s
Success in China is the absence of failure
1965-1985 – Family structure
Success in China is the absence of failure
There is more than one China
Economic geography of China
• North (Beijing, Changchun, Harbin, Shenyang,
Tianjin, Dalian): Rust belt: heavy industry,
heavy unemployment, destroyed environment.
Political and industrial, not commercial. Third
FDI destination.
• East (Shanghai, Hangzhou, Suzhou, Wuxi,
Nanjing) : High value added manufacturing,
heavy FDI, modernized economy, commercial.
Environment slightly less damaged. First FDI
destination.
• South (Guangzhou, Shenzhen, Xiamen,
Zhuhai, Zhongshan): Light manufacturing,
labor intensive industries, Oil & Gas, recycling.
destroyed environment. Second FDI
destination, mostly Asian.
• West (Chengdu, Kunming, Chongqing, Xi’an,
Wuhan, Baotou, Hohot): Heavy industries,
agriculture, very polluted, VERY corrupt, bad
economic situation. Ethnic minorities. Some
political violence. Said to be up-and-coming.
N
W
E
S
Success in China is the absence of failure
What this gigantism means
• The Sky is High and the Emperor Far:
relations with the local authorities are
important
• Local Chinese markets are different
• It is difficult to move your teams
• People are connected locally
Success in China is the absence of failure
Social Dynamics
• Truth
• Understanding of power: from the family to
society
• The guanxi system
• What makes contracts different in China
It is not about the people you do business with,
it is about how they interact with you
Success in China is the absence of failure
Truth
Success in China is the absence of failure
Truth Redux
• What do we learn from Zhuangzi (and
Heidegger)
– Truth can be inferred, it is an implicit world
– There is no demarcation between subject and
object, not leaving space for absolute truth,
– Truth is relative to the context of the enunciation
• How this translates to business
– There is no rational business conversation
– Your “fact-based” truth does not matter
Success in China is the absence of failure
Guanxi or Social Networks
•
•
Social interconnections, organized
Origins of Guanxi: Guilds
– Short story of a cobbler in Ancient China
• The guild of cobblers
• Autarkic village
• Making the deal
• Breaking the deal
• Protection
– The morals of the story:
• More than moral suasion: excommunication
• Informal judicial systems and business
promotion agencies
Success in China is the absence of failure
The Traditional Family or the
School of Power Thinking
• Traditional family
structure centered on
males
• From father to elder
son, to younger son
• The power of each
one is limited by the
power of the one
above in the line
• The law limits the
power of each one
Since families are linked by guanxi, the structure connects into society like a
power grid and transmits power virtually throughout the Chinese World
Success in China is the absence of failure
So What Does This Mean for
Business in China
• Very high incidence of
– Fraud
– Corruption
– Breach of Contract
– IPR Theft
Success in China is the absence of failure
Impact on Contracts
•
Impact on Contracts:
– Contracts organize horizontal relations between
equivalent actors, based on the possibility to
obtain enforcement – Chinese social fabric is
woven vertically, as everyone is above all a
member of a group
– Extension of the business networks beyond the
close family, though closeness prevents contract –
Contract allows business where there is no guanxi.
– However, guanxi is always stronger than a
contract
Success in China is the absence of failure
Corruption
• In a regimented society with positive freedoms, the control over the
licenses is extremely powerful.
• It is traditional for public officers to receive payments for their work,
or the absence thereof.
• Intermediation and facilitation fees are not considered as payoffs in
society, though they are in theory frowned upon by the legislator.
• The guanxi system allows for non-cash payments. Goodwill creates
debts.
• The brightest minds go to low-paying jobs in the public
administration. Their lifestyle shows they made the right choice.
• Corruption money is now sought after by foreign countries promising
citizenship or permanent residency against investment in jobcreating projects.
• There is an estimated USD 3.7 trillion worth of wealth in China, which
wealth is not under management.
Success in China is the absence of failure
IPR Theft
• Stealing a book is an elegant offense: tradition against the
protection of IPR
• Some figures to fathom the depth of the problem
– 90-99% of all software is pirated in China
– Over 50% of all shampoo, razor blades, cell phones, cigarettes
sold in China are fake.
– 50% of all branded bottled water is fake.
– 15 to 20% of the GDP of the country is constituted by the
manufacturing and distribution of forged goods. Some of it is
exported, some sold online or in physical stores dedicated to
fake goods.
– There even are fake stores, such as McDonald’s, IKEA,
Starbucks, Dairy Queen, Apple Store.
– American companies, according to the USITC, have lost USD 48
bn. in licensing fees in 2010 because of Chinese IP infringement.
Success in China is the absence of failure
Culture of Fraud
• Fraud? What fraud? Where there is no truth, there is no lie.
Where the others are only worth what you can get of them,
there is no fraud:
– According to a survey conducted by the Shanghai Academy of Social
Sciences in 2011, 90.2% of the respondents found that people who were
“honest and trustworthy” put themselves at a disadvantage.
– In 2010, 1,563 false (fraudulent) lawsuits in the province of Jiangsu have
led to an economic loss of USD 64 m. (RMB 390 m).
• Academic fraud, some figures:
– Wuhan university estimated in 2009 that the Chinese industry of the
production of fake research papers was worth USD 150 m. Its growth
rate was estimated at 250% per year.
– In 2010, Nature noted that 1/3 of the scientist at the 6 top Chinese
research institutions confessed to plagiarism, falsification and fabrication.
• Fraud investigation and mitigation has become an industry of
its own.
Success in China is the absence of failure
PERNOD-RICARD CASE STUDY
SJ GRAND Financial and Tax Advisory
25
The Story of Pernod Ricard in China
Key figures
1987
Pernod-Ricard started a joint venture in China with the locally
made wine called Dragon
1989
The company bought Australia’s best-selling wine : Jacob’s Creek
1998
2.3
million
Pernod-Ricard exited : as being a foreign company, they were not
allowed to own the brand at that time
Cases of cognac were sold in the country in 2011, 22% increase over
2013
SJ GRAND Financial and Tax Advisory
26
The Joint Venture with Dragon Seal
Pernod Ricard (“PR”) chose to enter
the Chinese market through a Joint
Venture (“JV”) with the Chinese
leading wine-maker Dragon Seal
(“DS”).
PR would bring the French winemaking technology, cash investment
and specialists to train the JV’s staff.
DS would contribute the ownership of
the brand, some of the equipment, the
factory and the distribution networks.
The JV was established in the Beijing premises of the Dragon Seal
company, in 1987.
SJ GRAND Financial and Tax Advisory
27
One Bed, Two Dreams
PR trained the personnel of the JV, which started
producing an international-standard wine under
the old and recognized brand “Dragon Seal”,
formerly owned by the DS Company and
contributed to the JV.
A few years later, in the early nineties, PR
executives heard reports that a very low quality
wine was sold under the brand “Dragon Seal”.
Acquiring a stock, the French team realized that
the wine was indeed of very low quality, but
bottled in identical bottles, with identical labels
and markings.
The origin of the bottles was traced to a factory
adjacent to theirs, and belonging to DS.
SJ GRAND Financial and Tax Advisory
28
Pernod Ricard in China
Confronted, DS executives recognized
that they were producing fake Dragon
Seal wine, but refused to stop the
production, arguing that they owned
the trademark.
By 1996, the brand having taken a
beating, and to save their business, the
PR executives proposed DS technical
help
The idea would be to help DS produce a decent wine thanks to French
supervision, as long as it was under a different brand.
DS executives refused to relinquish the illegal usage of the brand, which they
considered owning in spite of having transferred it to the JV.
After some legal struggling, PR exited its JV with DS in 1998, having created its
own direct competitor. DS hired French winemakers to oversee production.
SJ GRAND Financial and Tax Advisory
29
Pernod Ricard in China
PR learned from the Dragon Seal
debacle and, the Chinese market being
impossible to pass, chose another
strategy allowing it to control most of
the chain: importation of brands of its
portfolio.
Demand for spirits such as wine, draft
Beer and especially for premium
Cognac continues to surge in China,
despite growing consumption of
Scotch and Vodka.
Indeed, in recent decades the China’s economic boom created new Cognac
consumers and the mainland China market become indispensable for PernodRicard which responded to the demand with its Martell cognac.
SJ GRAND Financial and Tax Advisory
30
Pernod Ricard’s return to the China market
Pernod Ricard now imports, markets and
distributes in the PRC brands it owns, without a
Joint Venture partner.
The strategy has shifted from leaving the
marketing and distribution to a Chinese partner to
taking control, from selling locally-made products
to importing, and from middle range to higher
middle market.
SJ GRAND Financial and Tax Advisory
31
Today: A wide range of products
SJ GRAND Financial and Tax Advisory
32
CADDIE CASE STUDY
SJ GRAND Financial and Tax Advisory
33
Caddie comes to China
To serve the fast-growing food retail
industry of China, Caddie, the world
leader in the shopping trolley industry
established a factory in the Shanghai
municipality, to be headed by their
former importer, Frank Jiang.
The factory would produce the shopping
trolleys locally and sell them to the
Chinese as well as Asian markets
Caddie Shanghai generated 25% of the
world turnover of Caddie Group in 2010
Caddie ran into financial trouble around 2010 and was purchased and
restructured by Altia Group, a French PE fund in early 2012.
The Chinese operation went largely unmonitored for over a year.
SJ GRAND Financial and Tax Advisory
34
Caddie, meet Frank Jiang
• SJ Grand was hired to conduct the pre-acquisition audit in late 2012 and
pointed out severe accounting irregularities, as well as a potential fraud.
• After more investigation, the General Manager had established 17 companies to
supply all the raw materials and machines as well as to purchase the finished
products, diverting the profits of the company into his pockets.
• The new owner of Caddie tried to negotiate with the GM in spite of our
recommendation to strike hard and fast.
• We also found HK bank accounts used to divert revenues of foreign sales.
• Confronted, the GM went to the next level and started moving the machines
out of the premises, into a new factory established across the river in Jiangsu.
• This new factory is using the brand name Caddie.
• The account manager with the bank (HSBC), coming from the same village as
the GM refused to cooperate. A collusion is suspected but not proven.
• The local police refused to intervene against the Chinese GM, in spite of assault
against an auditor, and instead helped the local bodyguards remove evidence
from the hands of the audit team.
SJ GRAND Financial and Tax Advisory
35
The End of the Affair with China
• When informed the officer of the local bureau of the Administration of Industry
and Commerce with the MoC threatened the lawyer of Caddie France before
our team for helping a foreign company against a Chinese entrepreneur. The
new banker taking over the accounts, was also threatened by the police.
• The GM, effectively fired from Shanghai Caddie, refused to return the official
documents allowing to effect changes to the company’s registration, officially
remaining the head of the company in spite of the shareholders’ decision.
• Caddie France sued the GM as well in March 2013 for embezzling millions of
Euros as well as theft and his new company, Jiangsu Caddie, for IP infringement.
• The Shanghai government, seized by the French Embassy, launched an
investigation and an action, putting in charge of the file the officer of the AIC
who had threatened the lawyer two weeks before.
• The damage has been estimated at several million Euros, but the exact sum is
undisclosed. It is public, however, that the turnover of the company in 2012
was EUR 15M, and most of it had been diverted into other companies’
accounts.
SJ GRAND Financial and Tax Advisory
36
The Absence of Immediate Failure
The western world
The Chinese world
• Contract
• Family links
• Authority relations
• Power relations
• Strong judiciary
• Weak judiciary
• High-trust
• Low trust
Success in China is the absence of failure
Success in China
Or the Absence of Failure
Q&A
Dr. Stephane J. Grand