Is too late to enter china

The Globe

Edward Tse is the chairman of Booz & Company, Greater China and the author of The China Strategy: Harnessing the Power of the World’s Fastest-Growing Economy (Basic Books, 2010).

Is It Too Late to Enter China?
Yes, it’s a tough market. And yes, your competitors may have gotten there first. But the biggest mistake would be choosing not to invest in China. by Edward Tse

I
ABOVEHu Jintao, China’s president, led a successful stimulus spending effort
96 Harvard Business Review April 2010

s now a smart time to enter or expand in China? On the one hand, the answer seems like a no-brainer. While many other countries have slipped into an economic coma, China is humming along, with Goldman Sachs projecting that the economy will grow by more than 11% in 2010. On the otherhand, these are not happy times for many foreign investors. The clash between Google and the Chinese government, along with the ongoing vulnerability of intellectual property rights and continuing restrictions on foreign ownership in China, makes CEOs wonder if a presence there is worth the risks.

In a recent article in Time, James McGregor, a consultant and former chairman of the American Chamberof Commerce in China, voiced some of the problems vexing foreign investors: competition from inexpensive knockoffs; rivalry from state-owned enterprises that enjoy special advantages; and seemingly duplicitous government policies such as the selective enforcement of World Trade Organization norms. McGregor wrote that CEOs are “losing sleep over expectations that their onetime [Chinese] partnersare morphing into predators—and that their own technology and know-how will be coming back at them globally in the form of cut-price products from subsidized state-owned behemoths.” There’s also a growing perception that the Chinese government has hardened its attitude toward the outside world, blaming the United States for creating the global fi-

PHOTOGRAPHY: GETTY IMAGES

HBR.ORG

CHINA’SSCORCHING PACE OF GROWTH
The recent recession seems to have been just a temporary setback for China.
REAL GDP GROWTH RATE 15

nancial crisis, and favoring local companies over foreign ones. These challenges are real, but they aren’t new—and they certainly don’t tell the full story. To enter a complex country like China without understanding the context is folly. Although the Chinesegovernment began freeing the economy from controls in 1978, it has always wielded a strong hand over business, balancing the need for economic growth—and the entrepreneurship that demands—with its overriding desire to maintain political and social stability. The government still prevents foreign companies from entering core sectors such as telecommunications and media. It has also restructured andrejuvenated state-owned companies, including Baosteel, Industrial and Commercial Bank of China, China National Petroleum, and China Mobile. They are becoming fierce competitors, particularly since they enjoy government backing. In the sectors that any company may enter, China is awash with competitors, both local and foreign. Look at the figures. The number of private companies in China shot up from140,000 in 1992 to 6.6 million by the end of 2008, even as the number of foreign corporations grew to 435,000. Of the Fortune 500 companies, about 480 are already in China, according to its government. This makes for a marketplace in which Chinese and foreign companies battle for survival. Several surveys report that profits are slowly rising but that most multinationals still find it tough to earn themargins they can realize at home. Indeed, many enterprises and entrepreneurs believe that soon it might be too late to enter China successfully. Although it may be scary to consider entering what is arguably the world’s most complicated and competitive market, the notion that it isn’t necessary to do so is misguided. Few Western companies were prepared for the speed of China’s recovery; fewer...