To find two contrasting stories of leading US companies doing business in China, you need look no further than Boeing and General Electric.
Both have ambitions to cash in on China’s rapidly developing aviation industry. But for Boeing, it has been an uncomfortable few days, following a diplomatic spat over a US arms package to Taiwan, worth $6.4 billion.
Although cross-Strait relations have improved significantly in recent years, Taiwan’s ties with the rest of the world remain a sensitive issue in Beijing, and the Chinese leadership is deeply displeased by the arms sale. Having failed to influence Washington on the deal, it is turning its attention to the suppliers themselves. It has been reported that Boeing – along with other firms like Lockheed Martin and United Technologies – may face sanctions.
So far, GE seems to have steered clear of the diplomatic turbulence. Its own approach has been to partner with China’s state-owned enterprises (SOEs). In November, it established a joint venture with leading aircraft company Aviation Industry Corp (AVIC) to develop and market avionic systems for international aircraft manufacturers (avionics are the electronic systems used for communication and navigation).
It is also looking to become a lead supplier for the C919, China’s first locally developed passenger plane, which is expected to enter service in 2016 (see WiC31). The company developing the aircraft, Comac, is a subsidiary of AVIC and expects to sell 2,000 aircraft in the first two decades of service.
GE is already enjoying some success. A month after it set up its partnership with AVIC, it announced that engines that it produces with French company Safran Group will be used in the C919. It seems likely that its relationship with AVIC played a part in the selection.
GE is making friends with other major SOEs too. Late last year it set up a partnership with energy giant Shenhua Group to advance clean coal technologies.
It has also formed a JV with China South Locomotive and Rolling Stock Corporation to build locomotive diesel engines. An MOU has been signed with the Ministry of Railways to pursue high-speed rail opportunities in the US too.
GE’s deals on the ground in China are a recognition that many of the country’s national champions belong not to the private sector, but to the government. Recent months have seen state firms active on the dealmaking front, often flush with loans from the state-owned banks. Maybe someone back at the US HQ has taken note of the trend – much discussed in WiC – of guojinmintui (translated as “the state advances as the private sector retreats”). Still, the recent flurry of announcements must be the fruit of lengthy negotiations. GE will have been working behind the scenes for a while.
GE’s strategy is noteworthy too in exhibiting an enthusiasm for the JV, a business structure that has become less popular within China’s foreign business community in recent years.
In part that is down to some high-profile JV disasters (see Danone’s experience with the Wahaha Group in WiC39). But it is also because the government has made it easier to start wholly foreign owned enterprises (WFOE) in all but a handful of ‘strategic’ industries. Between 1998 and 2004, the proportion of companies choosing to set up by themselves – rather than partner with a Chinese firm – rose sharply from 42% to 76%.
GE seems to be heading back down the joint venture path (although some of its businesses are in areas in which they are still required from a regulatory perspective). Given the the size and complexity of some of the new businesses that it is trying to create, having Chinese partners (especially government-owned ones) will also help with opening doors and getting things done.
For the SOEs, an association with GE serves as a good marketing tool, as well as a potential introduction to overseas markets. Take the avionics business: although components for commercial aircraft are frequently made in China (aircraft are assembled there too), many passengers will be cautious about planes where crucial parts – such as those controlling navigation – carry a “Made in China” label. That means airlines might be reluctant to commit to orders. But having GE on board will help to offset some of those concerns.
In the aerospace joint ventures the Chinese have also been clear that they expect a fuller transfer of technologies than has often been made available by Western firms in the past.
GE’s strategy does come with risks. Major US corporates like Google have had a tough time recently after falling foul of Chinese officialdom. GE will have to be careful to avoid getting sucked into similar Sino-US spats. And for a sprawling company that also does business with the US government, that could be extremely tricky.
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