Standards are slipping

Call it customer inflation. Carl Crow, the American owner of China’s first foreign advertising agency, is best known for his 1937 bestseller 400 Million Customers.

But seventy years on and another American, James McGregor, was setting his sights higher, with his own book One Billion Customers.

Still, both authors were alert to the perils and not just the promise of the China market. And McGregor thinks many more foreign executives are up-to-speed too, according to an article (The China Fix) he wrote for Time magazine last month.

In fact, he argues that the perils may be outweighing the promise at the moment, and that many foreign executives are close to a “tipping point” such is their anger and disillusion with the business environment. If China’s deteriorating relationship with foreign business isn’t fixed soon, McGregor warns, things could get out of control.

Seems a little punchy. What are the leading complaints?

High on the list: regulations that favour local firms – such as a ‘buy China’ car policy for government departments – as well as rigged product standards and a limited respect for intellectual property.

But market access seems to be the key concern, especially for foreign companies who say that they are missing out on potential business being generated by the $586 billion of government stimulus spending initiated in late 2008.

Nor is this a new concern. Last year Alstom Transport – a high-speed train specialist – even went public with its frustrations, calling on other countries not to buy Chinese trains while foreign manufacturers were being shut out. “There’s no reciprocity any more,” the company’s CEO complained to the Financial Times.

Technology is another frontline…

This year the Google case has been stirring most of the interest, with accusations of a ‘China Inc’ plot against the search giant. Attempts to create proprietary Chinese technology standards (the TD-SCDMA mobile phone network or the WAPI wireless internet application, for instance) have also been generating concerns about a ‘techno-nationalist’ industrial policy. The fear is that – having already lost ground in low-cost manufacturing and assembly – international businesses could end up locked out of areas where they still have competitive advantages, like technology.

For example, the FT noted in a report last week that a new set of technology standards relating to encryption-related product (such as smart cards) had spooked foreign players. It is set to come into effect on May 1, but the newspaper said the EU and US were “pushing China to soften or drop plans for compulsory certification of a range of technology products, as foreign IT companies warn that Beijing’s regulatory requirements are pushing them out of the market.”

Nonsense, the Chinese counter. The proposed standards are signs of a new spirit of innovation and aim to improve on existing technologies. The Chinese also argue they don’t want to be dependent on foreign patents and have to stump up for all the royalty payments.

That may be so, but Chinese attitudes have also hardened. China has come through the global recession better than most and now it is asserting itself.

Are foreign firms over-reacting?

The head of Siemens railway division – a competitor to Alstom Transport – went on record last week as saying that it was “understandable” that China was reluctant to rely on entirely foreign-built trains. No histrionics from that executive.

Nor does China always get its own way.

Many of the efforts to develop alternative technology standards have struggled for traction too, including WAPI, the wireless standard. In 2004 Beijing tried to mandate that only WAPI encrypted devices were to be sold. But within four months the restriction had been “indefinitely postponed” after semi-conductor firms like Intel (then one of the country’s largest foreign investors) announced that they could not meet the standards and would cease shipment. Most of the large Chinese IT firms weren’t keen on the measure either (fearing the costs of developing a China-specific product and the likely commercial barriers to exporting it) and lobbied extensively against it.

Still, the ‘standards wars’ rumble on. The Ministry of Industry and Information Technology is currently insisting that manufacturers disable WiFi functionality on mobile phones. “In order to promote this so-called national innovation, China has sacrificed the interests of millions of cell phone users,” Kan Kaili, a telecoms expert based in Beijing, told the China Daily last week.

Perhaps foreign attitudes have changed?

Expectations about the ‘China opportunity’ have always ebbed and flowed, with periods of commercial optimism then tempered by experience. Clearly, current circumstances (to many) seem to indicate more of a downward trend.

One argument is that foreign firms have been investing substantially in China for a while and now expect to see more of a return. They may also be depending more on China sales, in light of lacklustre demand elsewhere.

Certainly, there is a sense that foreign firms are feeling a little under-appreciated, and last year’s EU China Chamber review of the business climate reads with an occasionally reproachful tone. Remember that at least 40% of the technology transfers introduced in China originated in the EU, it cautions. And don’t forget that China’s trade relations with Europe have a much bigger impact on the Chinese economy than vice versa (EU exports to China make up 0.7% of the zone’s GDP; Chinese exports to Europe constitute 7% of its own).

The subtext: you might want to show us a bit more love…

Do the numbers tell a different story?

Yes, other indicators do little to suggest that disgruntled foreigners are voting with their feet. Sure, FDI was a couple of percentage points down last year. But that was during a period marked by a global recession and the final figure still exceeded $90 billion. Another 23,435 new overseas-funded ventures were set up too. Again, this was down on the year before (by 15%) but still hardly indicative of a foreign refusal to play the China game.

Another of those business climate surveys suggests it remains a game worth playing. In its most recent annual study (2009) the US-China Business Council found that 84% of respondents were profitable in China. And almost half the respondents (46%) said that company profits in China were better than their performance elsewhere. Think GM, for example.

And as the government tries to stimulate domestic consumption, those 1.3 billion consumers look ever more enticing…

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