40 years of China's development and what to expect going forward ...

Strategic Planning Tool: This article provides a context for the environment western companies have faced, are facing, and, by inference, may have to face in China - it's a layman's history of China's past 40 years of economic and business development.

A layman's history - China's past 40 years of development

Since Deng Xiaoping opened China's $150 billion economy to the world at the close of 1978, China's sheer size, high growth, and cultural intrigue have attracted Western Business in search of financial gain and Western Governments for geopolitical and strategic reasons. Today, China is the "world's factory," the world's second-largest economy at GDP $14 trillion, and a military superpower. China has rewarded Western Business with a low-cost source for products and profitable sales within its vast market. Western Governments have benefited from Chinese cooperation on vital global matters and, more recently, outbound investment. Western Business and Governments, the Chinese, and the world can chalk up "China successes." But all is far from perfect.

In recent years, the US and other Western Governments have begun to feel the weight of China's presence on the global stage. Many believe that China is becoming more of an adversary and less a partner as China flexes its growing muscles. On the commercial side, Western Business, once China's most enthusiastic cheerleader and political lobbyist, has become increasingly wary of it future in China – years of struggle to crack markets, lost IP, changing government agendas, corrupt employees, and a slew of other China-specific challenges have taken a toll. Most recently, business constraints and uncertainties associated with the US-China trade war and COVID-19 pandemic have left Western Business wondering, "W T Firetruck?"

Despite being deeply invested in China, western businesses are beginning to rethink their China operations. Increasingly, Western companies ask if time and money spent will ever pay off, asking whether continued engagement is worth the risk. Western companies are now forced to reconsider how they operate their businesses in China, and whether a partial or full disengagement is in order. 

It would be difficult for many businesses to walk away, given their levels of investment and China's sheer size, though some companies will never make it in China and actually should walk. Assuming you are planning to stay or start in China, it is essential you carefully evaluate your path forward. You must consider multiple factors in making any critical short-term survival and long-term strategic decisions. 

That brings me to the point of this article and two that will follow, combined, a three-article series that will equip you with information and ideas to support your China business planning process.

• This Article, 30 Years of China's Development (A Layman's History): Provides a context for the situations western companies have faced, are facing, and, by inference, may face in China - "Those who cannot learn from history are doomed to repeat it," George Santayana.
• Next Article (Release before 7/27/2020), Five Good Reasons to Do Business in China: There are reasons why many western companies should continue or start doing business in China, despite current difficulties and future uncertainties. This article lays out several reasons for your consideration.
• Last Article (Release before 8/3/2020), Old-School and New Ideas for Doing Business in China: The last article is the start of a brainstorming session for strategic options companies might consider as they plan the future of their businesses in China, whether sourcing or selling.

In sharing these articles, my hope is that any China "newbies" out there might learn something useful, while old China hands can say, "yeah, that's about right." So, here we go with the first article in the series, a layman's history of China's past thirty years of development. Enjoy, and please share your thoughts.

China Factoid– American Policy Toward China: Starting with President Nixon in the early 1970s, the US had consistently maintained a policy of engaging China, and each president, excepting Trump, has generally supported the policy, often for fear of what might happen if China and the US were to disengage. You can read more about each president's China policy in the Appendix at the end of this article

China's Economic Opening – Who cares the color of the cat

It was December 1978 (so the story goes), when Deng Xiaoping followed the axiom "it doesn't matter if the cat is black or white, so long as it catches mice," and opened China to the world of capitalism – China's GDP was around $150 billion, at the time, one-fifteenth that of the US. And so, China began to grow slowly, then pick up speed and capture the attention of Western Business. Given China's huge market potential (e.g. "one point some odd billion people"), Western Business was gung-ho as ever as were the US and other Western governments who envisioned a policy of engagement would afford many geopolitical benefits. As foreign investment poured into China, the massive economic wheels began turning. Sure, the 1989 Tiananmen incident was a setback, but only for a couple of years, after which China was again on track racing toward the new millennium.

A China newbie's relocation to China, circa 1997 

We were all newbie's once - It was in January of 1997 when I made my first trip to China to decide whether to accept a Shanghai-based assignment my US employer had, at my suggestion, offered me. I flew into Hongqiao International Airport, Shanghai's only international airport at the time. It was small, weathered, and had an inherent socialist quality about it – actually, kind of retro, kind of cool. 

Stepping outside, I expected to see armed soldiers on every corner, I saw none. It seemed all taxis were a bit dirty, beaten, and smelled of cigarette smoke, and the drivers were crazy, given their full rein on roads vacant of private cars. The elevated highways, so prevalent today, did not exist. As I had imagined, bicycles were everywhere, carrying riders dressed in bland colors. 

Shanghai's twisting and turning streets were small and tree-lined, the buildings and shrubbery everywhere were illuminated with the same decadent dark limey green lights, undoubtedly from the same factory. The city was alive with movement, and people were friendly to foreigners. There was a tangible sense of "can do" in the air.

Hotels buzzed as international business travelers busily engaged their Chinese counterparts, of course, while drinking tap beer in lobby bars as Philippine bands played American pop songs in the background. Business meetings were generally challenging, given language barriers and all. But, my Chinese colleagues were admirable going out of their ways to ensure I was comfortable and informed, which, in a certain way, made me feel a bit uncomfortable. 

I traveled to Beijing and other cities, a few very much out of the way, and very different than I'd ever seen. But without a doubt, China was alive, and in my eyes, was the new frontier. Did I mention that I like frontiers? Unsurprisingly after a fast two weeks, I was hooked and decided to take the assignment. China was going somewhere, and I, like a whole lot of other foreign business people at the time, wanted to be a part of it.

In the summer of 1997, I packed up and moved from Southern California, USA, to Shanghai, China, followed closely by an air shipment of my favorite cereal, wine, shampoo, toothpaste, candy bars, VHS movies, and other essentials that surely did not exist in China. China welcomed me and all other Western ex-pats with open arms, making each of us feel more special than I now know we actually were. But who cared, my cohorts and I were fully addicted to China business, China life, Chinese people, and Chinese banquets, and we would remain so for many years to come.

China GDP Factoid: In 1997, China's GDP passed through $950 billion, while the US GDP was around $8.6 trillion.

It was a great time to be working in China. Chinese were thirsty for Western ideas and concepts, and we Westerners felt truly welcomed. Chinese were eager, enthusiastic, industrious, and highly motivated. Year-on-year, their lives had become increasingly better. I watched as my Chinese colleagues bought their first apartments, and then automobiles - think about it, China was building all new roads that were filling with first-time drivers, yep, it was interesting. 

There were a few MacDonald's, KFCs, and a Pizza Hut or two, while Starbucks was still about a year-and-half away. In the late '90s, very few Chinese used credit cards, but instead carried 10,000 RMB stacks of cash in stylish little leather handbags to pay for the likes of televisions sets, clothing, and dinners they hosted. Only one ATM in Shanghai accepted international bank cards, and my Bank of China ATM card worked only within Shanghai's city limits. Goods ordered by phone were shipped to your home COD, allowing you a door-side quality check before remitting payment. It was inconvenient but fun, and it all changed quickly.

China Life Snapshot: Once in my rented apartment, I shopped around and ordered a custom living room set. On the promised shipping day, I happened to look outside my 18th-floor window to the drive far below, knowing the delivery should be coming soon. What I saw was a large mass with a familiar pattern pushing a little man in front. "What the heck is that," I wondered, only to realize it was the full-size sofa and two love seats I'd ordered, not pushing a little man but being pulled by him on his delivery tricycle, a "huangyu che" (黄鱼车) or "yellow croaker bike." Such trikes were once frequently used to deliver yellow croaker fish. I was impressed.

A new millennium comes to China

As a new millennium arrived, increasing numbers of Western companies were looking to China as a source for low-cost goods to serve their home and other markets. Other companies sought a lucrative slice of the Chinese market, attracted by China's rising middle-class and the simple calculus, "if we could just sell just one widget to every Chinese person…" Company after company set up Rep Offices and WFOEs and boatloads of registered capital flowed in. 

With highly favorable investment and tax policies amplifying China's draw, new offices, modern factories, and integrated industrial parks sprang up all over China. As large multinationals set up shop, they pulled many of their Western suppliers into China with them. "If you can't supply us locally in China, we'll have to switch to a local Chinese supplier," was the standard edict. Designed to attract Western investment and technology, China's economic model was working. 

GDP growth pushed toward 10%, talented young workers dreamed of work in Western companies, and China's enthusiasm for all types of western engagement skyrocketed. The 30/70 urban to rural population rate was beginning to shift as Chinese cities expanded – at the time, it was purported that around 20% of the world's tower cranes could be found in Shanghai. Spurred by foreign investment, knowledge transfer, and homegrown ambition, China was morphing into a modern country and economy right before our ex-pat eyes.

China, Hong Kong Factoid: On July 1, 1997, and then December 20, 1999, Hong Kong and Macau returned to China from Britain and Portugal, respectively. Whereas China had granted Portugal permission to use Macau to support trading activities in 1557, Britain had forcibly taken control of Hong Kong in 1841 at the end of the First Opium War. Understandably, the return of Hong Kong, and Macau to some degree, were emotional milestones for the Chinese people and a step toward China's national restoration. 

In the late 90s, early 2000s, under Chinese Premier Zhu Rongji, China busily implemented a series of economic reforms that included SOE privatization, private homeownership, bureaucratic streamlining, and corruption controls, to name a few, as part of its bid to join the WTO. Many of the reforms were required by the US, EU, and Japan before they would accept China's membership. All reforms served to modernize China's economy, making it more competitive. Hoping to capitalize on its opening, American and other Western multinationals were highly supportive of China joining the WTO.

After rounds of negotiations, China ascended to the WTO under a modified "developing country" status in 2001. While China had been leery of joining WTO for fear it would force its markets open too quickly for comfort, Western businesses were lined at the starting gate ready to charge and charge they did. In retrospect, it is clear that China's joining the WTO put a hockey stick in its GDP growth curve, with GDP shooting up from 8.3 % in 2001 to a high of 14.2% in 2007. See the GDP chart below.

By 2008, China had restructured numerous large SOEs, including Baosteel, Industrial and Commercial Bank of China, China National Petroleum, and China Mobile, laying off tens of millions of workers. Concurrently, the number of private Chinese companies increased from a mere 140,000 in 1992 to over 6.6 million. Multinational corporations in China numbered about 480,000, of which 480 were listed on the Fortune 500. Companies such as VW, GM, Microsoft, MacDonald's, KFC, Pizza Hut, Motorola, General Electric, Philips, Siemens, Boeing, Nike, Coca-Cola, P&G, and Intel were widely known and respected in China, and most were profitable. Annoyances aside, Western businesses remained optimistic about their futures in, and champions of China.

China's success "shocks and awes" the West

Through the 2000s, China hurried infrastructure building. As some of the tallest buildings in the world shot skyward in Chinese cities, an endless network of highways branched out like fast-growing vines, ultra-modern airports materialized from nothing, and the first legs of China's "homegrown" high-speed rail system, now unmatched in the world, began crisscrossing the landscape. Western Business and Western Governments watched in awe, both wanting a share of the China Miracle. In the eyes of the world, China had taken on mythic proportions.

China SARS Factoid: The Severe Acute Respiratory Syndrome (SARS) outbreak started in Guangdong Province, China, in November of 2002 before spreading to Hong Kong and other parts of China. The virus behind the disease, like with COVID-19, was a novel virus that spread quickly. A total of 8,096 infections and 810 deaths were recorded. The epidemic tapered in May 2003 before ending that same summer. The economic impact was severe but local at the time, and much smaller than with COVID-19. Between February and May, China's retail sales dropped about 60%; industrial output 30%; exports held steady, and imports dropped by about 50%; estimated drops in GDP for China and Hong Kong, averaged over ten years, were -2.35% and -3.21%, respectively; for countries outside of China, the negative impact on GDP was well below 1%.

As 2008 approached, Beijing busily prepared for the Summer Olympics by pumping an estimated 40 billion dollars into new transportation infrastructure, lodging, the Olympic Park, the Bird's Nest Stadium, the Water Cube, and security systems. China was on an upward trajectory, feeling good and determined to wow the world with its first-time at hosting the Summer Olympics. 

China's carefully selected Olympic athletes trained intensively for years, not only for the glory of gold but, importantly, for national honor. China enlisted its most famous choreographers, called in the best special-effects engineers, and readied over 15,000 talented performers to support the opening and closing ceremonies. When all was said and done, China had put on one of the most spectacular Olympic shows and best gold medal performances in history. Beijing hauled in 51 gold medals comparing to the US' 36 and Russia's 23. The Chinese were jubilant and proud of their national accomplishments, and rightly so.

China Olympics Factoid: The total medal count was US 110 and China 100, but China had won 51 gold compared to only 36 for the US. Interestingly, the US athletes were noticeably happy to Chinese viewers, even when standing on the podium and receiving only silver or bronze medals. This apparently perplexed many Chinese, "How could Americans be happy receiving less than gold medals," they wondered. For the Chinese, second place was not an option as only gold would afford the honor, respect, and national face China desired. Committed to success, China implemented a strategies – roughly translated "The General Outline for Winning Honor at the Olympics" and an associated "gold medal strategy" – whereby China focused its Olympic preparation on target sports for which China would have the best chance of winning the most gold medals. China's strategies paid off.

A Western SNAFU and a China metamorphosis 

No sooner had the Olympics faded from view than the global economic crisis hit. It had been building in the US and other Western countries for years spurred by increasingly loose mortgage lending practices along, "if you can breathe, you can borrow," and the risky deployment of mortgage-backed securities. The debacle hit with a vengeance on September 17, 2008, with Lehman Brothers as the first significant casualty and the likes of Merrill Lynch, AIG and Freddie Mac begging for life support. Then on September 29, Wall Street tumbled a record 777 points, destroying retirement plans and the lives of those plans' owners in an instant.

Central banks around the world reacted by pumping money, big money, into their economies. With a GDP still only 1/3 the US', China invested nearly $600 billion, much for new infrastructure, as demand for its exports tanked. Comparably, the US' initial asset relief package was $700 billion. Whereas China's stimulus was an "investment" toward arguably needed infrastructure, the US' cash infusion was a transfusion just to keep its financial system alive. The US, Western European, and Japanese economies dropped into recessions. China avoided recession though its GDP growth rate decreased from 14.2% in 2007 to 9.4% in 2009, "ah, boo hoo".

I wholeheartedly believe the events of 2008 changed China, causing a shift in the CCP's and China's national psyche. Watching the US and EU financial systems near collapse, China realized their Western "teachers," the ones who'd been preaching to them for years about running their economy and country, maybe weren't as smart as they'd let on to be. After all, China had just hosted a spectacular Olympics and survived a global economic calamity nearly unscathed, but "look at the West." 

China knew it was time to break from the dictates of the West, and just like that, China let go of "a hundred years of humiliation." An emerging confident China turned rudder, looking more inward for inspiration and outward to reclaim its rightful place in the world. China began to more assertively push its paradigms for development, wealth creation, and governance out into the world, and many countries admired China. In the eyes of the West, however, this proud renewed China seemed a little less cooperative, slightly more belligerent, and uncomfortably active on the global stage.

US China Policy Factoid: The Nixon administration had three main objectives for engaging China – 1) to show goodwill to 700 million Chinese citizens and move them from hating to accepting America; 2) to use China as a strategic counterbalance to the Soviet Union; and, 3) to use economic development to turn China into a more democratic state. President Bill Clinton added peacefully integrating China into the existing international system of laws and trade to help it grow into a "responsible stakeholder." Avoiding military conflict was always a key objective, as well. The ongoing engagement process included the US and Western allies offering words of advice or censoring whenever China deviated from one of the West's economic, political, human rights, territorial, environmental, or other governing principles. No, China never much appreciated this aspect of the West's engagement policy.

China's economic growth continued – On August 15, 2010, The New York Times reported, "After three decades of spectacular growth, China passed Japan in the second quarter to become the world's second-largest economy behind the United States." According to the Times, China had begun to reshape global economic norms given its "growing dominance of trade," massive foreign reserves, and insatiable demand for natural resources. Companies from the US, EU, and Japan had grown increasingly dependent on China's supply chains and low-cost manufacturing, not only buying from Chinese suppliers but moving manufacturing lines and technologies there as well, often under the guise of "to serve the Chinese market."

Other countries such as Australia, Russia, India, and many from Latin America had grown dependent on China for commodity sales, including oil, coal, and iron ore. Smaller countries surrounding China benefited from selling products into China. Companies and politicians from around the world bent over backward to get in the good graces of China. It seemed that optimism, and on a deeper level, fear of being left behind or overrun (by competitors) caused many Western players to leave sensibilities at the door. Despite growing concerns, the West's big China party continued unabated.

From May 1 and October 31, 2010, Shanghai hosted World Expo 2010 with the theme "Better City, Better Life." In preparation, Shanghai invested some $48 billion to relocate 18,000 families, move 270 factories, build out the 5.3 square kilometer site along the Huangpu River, add six new subway lines, and christen four thousand new Expo-styled taxis replete with images of the Expo's blue mascot Haibao. Countries from around the world constructed well-thought intricately designed pavilions. Many were quite impressive – think Spain, UK, Russia, Norway, Canada, Germany, South Korea – though, China's "fortuitous red" pavilion, stylized with ancient Chinese elements, was by far the most spectacular. When all was said and done, 246 countries and organizations had participated, and 73 million visitors had attended the Expo. Of all the World's Fairs, Expo 2010 set records for physical size, investment, number of participating countries, and overall visitors.

US Expo 2010 Pavilion Factoid: The US barely scraped together funding for its pavilion (the US government does not fund Expo pavilions) and only succeeded late in the process, thus avoiding embarrassment for both China and the US. The pavilion was simple in design, a 60,000 square foot warehouse with four large rooms playing specially themed films to highlight American ideals and spirit. The audio-visuals, including one 4-D production, were produced in Southern California. Only by leveraging Hollywood's film expertise could the US prepare and participate an exhibit in such a short time. Dichotomous reviews were either "great" or "unimpressive," depending on the survey. As an American, I was proud of the themes of the short films, however, I can barely remember the pavilion's exterior, and its dark interior with black curtain dividers gave the impression of "quick and temporary."

Do all good things China have to end?

By 2010, tensions between China and other countries were increasing. One prominent case was that of Google. Google had been providing censored in-China searches to comply with Chinese laws when, as Google claims, its servers were aggressively hacked from within China; other prominent American IT firms claimed the same by only in private - You can search Google for details ;-). In protest, Google stopped censoring searches in China. Needless to say, China was not happy, and Google chose or was forced to exit the country. 

At about the same time, the Obama administration announced its "rebalance to Asia" policy in a move to confirm support for allies and friendly countries bordering on the South China Sea. This happened as China was building "defensive" infrastructure on small landmasses within the South China Sea, to which China and other countries lay claim. The US and China failed to see eye-to-eye on this matter, and China viewed, still views, the rebalance as just another US attempt to contain China. Much is written in other publications about the ongoing South China Sea disagreements.

In another prominent case, China cutback on exports of critical rare earth minerals to Japan, the US, and other countries claiming illegal mining and "environmental reasons." Japan, however, felt it was in retaliation for the capture of a Chinese fishing trawler in Japanese waters, and the US linked it to its launch of a WTO investigation into Chinese subsidies for green energy companies. Reasons aside, the Chinese export quotas raised suspicions in the West, further souring relations. Other issues affecting China's international relations included a "devalued" Yuan and growing outbound Chinese investment that invited the same "they're going to own us" reflex as had the significant Japanese investments in the US of the 1980s.

China Outbound Investment Factoid: After the 2008 economic crisis, assets around the world were "cheap." Rich in foreign reserves and after notable acquisition failures in the early 2000s, China revived its outbound investment strategy to focus on acquiring prestigious brands, market access, and needed foreign technology. In automotive, China's Geely Holdings acquired Volvo from Ford Motor Company for $1.5 billion, making it China's most significant acquisition of a foreign brand. That same year, CNOOC invested $3.1 billion for a 50% in Argentina's Bridas Petroleum, owner of the largest petroleum field in the country.

A confident Xi Jinping replaced a more reserved, technocratic, and consensus-building Hu Jintao as President of China in March 2013. Xi came into power determined to rejuvenate the nation, and help all Chinese realize their equivalent of "The China Dream." Xi began with cleaning up the corruption that was destroying the party from within and strengthening China to more quickly take the "inevitable position" as the world's number one nation. 

Xi's anti-corruption campaign targeted both "tigers and flies," resulting in the implication of over 100 provincial-ministerial level, and over 200,000 low-ranking officials within the first two years. The campaign reinforced Xi's position, and Xi became increasingly popular as the Chinese masses began referring to him as "Xi Baba" or "Big Daddy Xi." Some even began comparing Xi to Mao Zedong, given his popularity and perceived level of power – in 2017, President Xi also published his own equivalent of Mao's "Little Red Book" entitled "Xi Jinping Thought."

Xi's actions to-date include confident engagement of world leaders, tightening internet censorship, promotion of Chinese culture over imported Western values, and the strengthening of State-Owned Enterprises through the reversal of earlier SOE reforms, and most notably, giving all Chinese a heightened sense of confidence in the world. After President Xi's coming to power, I sensed the emergence of an increasingly confident China and Chinese populace, and the West's diminished importance to both. Meanwhile, Western Business charged ahead like a partner in a romantic relationship, smiling, not wanting to acknowledge the relationship's flaws.

China, the new superpower on the block

Geopolitically, President Xi's China continued raising eyebrows in the West, mainly those of the US, given Xi Jinping's moves for China to project a more nationalistic and assertive image to the world. Obviously, President Xi commanded the respect of other world leaders, though sometimes at the expense of catalyzing suspicions about China's intentions. Without suggesting right or wrong, concerns, and perspectives that arose between 2012 through 2018 include –

• Military Reform: President Xi reformed and modernized China's military and weapons systems, taking control of the military. In China's eyes, China was just gearing up as any country of its size would to protect its borders. To the West, it seemed China was becoming militaristic. 
• Cyber Attacks: The US and other countries alleged relentless state-sponsored Chinese hacking of business and government networks for commercial and military gain. China has consistently denied all such allegations while claiming it is a victim. Western governments and businesses have been shy to talk about it for fear of retaliation and lost revenues from China. 
• South China Sea: China expanded its presence in the South China sea through "island-building" to the protests of other countries bordering the sea. China says the landmasses they have secured in the South China Sea have always been an inseparable part of China and are critical to its security. The US and countries around the South China Sea claim China is being "expansionist" and in violation of maritime law. The US, to China's chagrin, started conducting "freedom of navigation" exercises.
• AIIB: China established the Asian Infrastructure Investment Bank, which the US believes is another step by China as it attempts to rewrite existing international systems and norms. China sees the AIIB as a way to help smaller developing countries, through a vehicle China can control. Of course, the US views AIIB as competition to the US-controlled World Bank.
• BRI: To facilitate trade with China, President Xi launched his signature Belt and Road Initiative designed to revive the old Silk Road trading routes over land and add news ones by sea by supporting infrastructure building in countries from China through Asia, the middle east, and Europe. China views the BRI as a goodwill project that will benefit many otherwise economically isolated countries. The US sees BRI as a play by China to gain geopolitical influence and a level of control over many smaller but strategic countries.
• China 2025: President Xi openly initiated the Made in China 2025 plan designating strategic growth industries China intends to target and dominate through a variety of means, and ultimately eliminate China's reliance on American, European, and Japanese technologies. In China's eyes, MIC 2025 is necessary for national security and an excellent way to move up the manufacturing value chain as labor costs rise. In the eyes of the West, the initiative is tantamount to "industrial policy," in violation of WTO rules, and sure to lead to aggressive technology acquisition practices.

As you can see, 2012 through 2018 was a busy time for China, both internally and globally, given the many initiatives China pursued to strengthen its position and the concerns they raised. Interestingly, China was often caught off guard, when many of its actions received a cold reception in the West, particularly in the United States. And this is where cultures disconnect, meaning that often what is perceived as good or common practice in China is viewed negatively in the West, and, of course, vice versa.

Now, it is impossible to separate geopolitics from economics and business. Consequently, it was geopolitical murmurings and first-hand business experiences in China that had many Western companies starting to think a reform-minded opportunity-filled China, the one they'd dreamed of for years, was increasingly unlikely to materialize. As many early reforms beneficial to Western businesses were halted or reversed under President Xi Jinping, the foreign business community was coming to believe that maybe Beijing did not want it to win in China. 

Of course, there are always exceptions such as Coca-Cola, Starbucks, Apple, GM (JV with SAIC), and Yum Brands (KFC, Pizza Hut, and Taco Bell), companies that have been killing it in China. This is not to say the preceding "winners" haven't struggled, because they have and will surely have to again in the future (Yum has had to mitigate several significant and public food scandals in China). Importantly, however, none of the companies listed above are operating in "strategic" or "sensitive" industries.

Consider the case of General Electric, a world leader in power generation, aviation, healthcare, and renewable energy equipment. GE operated in China from 1906 through the end of World War II and restarted operations in 1979 when China reopened to the West. GE now has 7 R&D centers, 30 manufacturing bases, 30 plus JVs, a presence in 40 Chinese cities, and employs over 22,000 people. Despite China's vast high-growth market, GE is only able to generate about 8% of its global revenues in China. The situation will likely become more difficult as Chinese competitors refine their technologies to more effectively compete with GE in China and internationally. Even back in 2010, after achieving only 50% of its $10 billion revenue target for the year, GE CEO Jefferey Immelt expressed concern to the Financial Times, "I really worry about China, I am not sure that in the end, they want any of us to win, or any of us to be successful." 

Western Business begins flop away from China

Around 2015, after years of promoting "business with China," a critical mass of American companies started asking Washington for help; European businesses asked the same of their governments. Business surveys conducted by organizations such as the American Chamber of Commerce showed year-on-year deterioration in the moods of members regarding future prospects in China. In a Newsweek article "How America's Biggest Companies Made China Great Again," June 24, 2019, author Bill Powell wrote, "A senior executive at Honeywell in 2015 told me flatly that his company was fed up with Beijing's demands for technology transfer. Friends at CISCO and Microsoft said the same." 

You can't entirely blame China, however. For years, western businesses had been consistently unwillingly to file complaints in their names for fear of losing favor with Beijing. Only in a recent "nothing left to lose" moment, was a group of prominent business executives willing to share details about their long-running difficulties in China with President Elect Donald Trump. Those conversations, along with inputs from the likes of Peter Navarro, are what helped set the tone for the Trump Administration's current China trade policies.

As a citizen, Trump had been advocating tariffs against US trading partners since the 1980s to reduce trade imbalances. Unsurprisingly in 2018, now President Trump fired the first salvo in the US-China trade war, hoping to force China to resolve a growing list of complaints, not the least of which were a substantial trade deficit, IP theft, forced technology transfers, and a generally non-reciprocal trade relationship. Given the US' past "tread easy" approach, China was caught off guard by the Trump Administration's actions. Trump's "sporadic" decision making further aggravated the situation, confusing China about what to expect. Tit-for-tat volleys have resulted in US tariffs of $550 billion on Chinese goods and Chinese tariffs of $185 billion on US goods. The trade relationship had become unstable and unpredictable, making long-term business planning almost impossible. 

And when we thought it couldn't get any worse, enter the global pandemic, with seeming origin, China. In late 2019 early 2020, the blackest of all black swans, COVID-19, hit China and the rest of the world. Since then, the pandemic has thoroughly disrupted markets, supply chains, and the global trade system overall, of which China is so large a part. Many in the West blame China for current global woes. Need I say, the future shape of globalization and China's relationship with the world are highly uncertain. But, hey, read on.

Conclusions: Can you continue business in China?

Living and doing business in China has always been exciting for me, at times, highly frustrating. When you think you've got "business China" wired, something changes – economy, geopolitics, policies, markets, competitors, pandemics – that fundamentally alters the game. At times, "business China" can be unsettling and, as those with experience know, not for the faint-of-heart or the uncommitted (weak hearts might oughta stay home). But, knowing you've read this far, I suspect your heart is fine. It's been a tough few years in China and safe to say it will be tough for some time to come, so, what are you to do?

How long the pandemic will play out or when the next will come is anyone's guess, and the trade war rages on. These difficult times for China business are likely continue given negative bipartisan sentiments against China within the US and other Western governments. But, let's put tough aside. China is the world's largest market and will continue to grow despite pandemics or what happens with the US, Japan, and the EU. Going forward, China will still afford opportunities to certain companies, those with something to offer and who are willing to adopt an approach best suited to serving Chinese customers.

So unless your China business is truly hopeless, don't give up because even difficult stock markets can reward cool-headed traders. Instead get and stay cool, open your mind, and do your homework. Contemplate China's recent history, carefully consider your reasons for doing business in China, and then craft a China strategy while maintaining a willingness to break with old paradigms. Read the last two articles in this 3-article series, do your planning, and contact us if you need advice - Look for the last two articles:

• Good Reasons to Do Business in China: There are reasons why many western companies should do business in China, despite current difficulties and future uncertainties. This article lays out several.
• Old-School and New Ideas for Doing Business in China: This article starts a brainstorming session for essential strategic options companies should consider as they plan their future businesses in China, whether they are specific to sourcing or selling.

Be smart, stay safe, and good selling in China,

Chris Wingo, Managing Director

China Sage Consultants: Hands-on China sales and business operations support for western companies. Home to China Sales Incubator full-service sales outsourcing program — Since 2003, we have served up millions of dollars in China sales to our client companies. Contact us for your China sales and business support needs.

ADDENDUM: US Presidents' China Policies

• Nixon ('69 - '74): Nixon moved to engage China with the primary objective of gaining leverage over the Soviet Union. Furthermore, Nixon had always felt, "We simply cannot afford to leave China forever outside the family of nations, there to nurture its fantasies, cherish its hates and threaten its neighbors." Nixon accepted the conditional "One-China" policy to make engagement possible.
• Carter ('77 - '81): Continued the rapprochement with China initiated by Nixon to not only continue pressuring the Soviet Union but also as a means to boost trade.
• Reagan ('81 - '89): Reagan, who had always supported the "free Chinese" (Taiwan), continued arms sales to and pushed to reestablish official diplomatic ties with the island. China was not pleased but accepted the status quo, given its growing thirst for US capital and technology.
• George H. Bush ('89 – '93): Inaugurated just months before the Tiananmen Square incident. As Americans and Congress called for pulling back from China, Bush pushed in the opposite direction. He felt that the US-China relationship was too important to abandon, not only for the US and China but also for stability in Asia-Pacific.
• Clinton ('93 – '01): Continued Bush's policy, granted China "most favored nation" status, and lobbied WTO members to accept China as a member nation. His goals were to open China's market to US products, support US labor, and put China on a path to becoming more like a western democracy.
• George W. Bush ('01 – '09): The Bush administration took note of Beijing's increasingly state-directed industrial policy but failed to act aggressively. The administration did hold a "strategic economic dialog" with Beijing to address points of economic contention, but before any substantive actions could be taken, the 2008 global financial crisis hit, thereby firming Beijing's resolve to continue on its own path.
• Obama ('09 – '17): Attempted a "pivot to Asia" and confronted President Xi about cyber-hacking in 2015 but generally maintained a soft-handed approach. Obama's pivot to Asia is not considered a success; it almost seems Obama's policy was more non-engagement or avoidance oriented given the other significant challenges on his plate.
• Trump ('17 – present): If you know, please tell me in the comments.

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